Brief Healthcare: Horiba (6856 JP): Long-Term Buy on Pullbacks and more

In this briefing:

1. Horiba (6856 JP): Long-Term Buy on Pullbacks
2. UG Healthcare: Weak 2Q19 Driven by One-Off Issue, If 10% NPM Achieved in FY20 Trades at 4x FY20 P/E

1. Horiba (6856 JP): Long-Term Buy on Pullbacks

Horiba’s share price has rebounded on FY Dec-18 results that were above management’s most recent guidance and better than we had expected. Consolidated operating profit was up 7.5% on a 7.8% increase in sales, and net profit up 37.0% following extraordinary gains (vs. losses the previous year) and a lower effective tax rate.  

4Q results were weak, primarily due to the downturn in semiconductor capital spending, but this was no surprise. Total consolidated operating profit was down 10.3% year-on-year on a 2.3% increase in sales in the three months to December, while operating profit on Semiconductor Instruments & Systems (primarily mass flow controllers) was down 32.8% on a 15.8% decrease in sales.

Looking ahead, management is guiding for year-on-year declines in both sales and profits in the six months to June, again due to weak demand for semiconductor equipment, followed by a sharp rebound in 2H and low single-digit growth FY Dec-19 as a whole. Judging from the semiconductor equipment order flow, it appears that a weak 1H will be hard to avoid, while there is as yet no sign pointing to recovery. Nevertheless, we have raised our own sales and profit estimates for this fiscal year and next based on the absolute levels of orders and sales.

Automotive Test Systems and the company’s other businesses should continue to grow, supported by the acquisition of FuelCon AG of Germany (an industry leader in battery and fuel cell validation) and Manta Instruments of the U.S. (which makes nanoparticle tracking analysis systems). The issue, then, is how soon and how rapidly semiconductor related investments will recover. We suspect later and more slowly than management hopes, but in any case the downturn appears to have been discounted.

At ¥5,980 (Friday, February 15, closing price), Horiba has rebounded by 44% from its January 4 low of ¥4,155, but is still 38% below its ¥9,590 all-time high reached last May. It is now selling at 13.6x our EPS estimate for this fiscal year and 12.3x our estimate for FY Dec-20. These and other projected valuations are on the low side of their 5-year historical ranges. Once the recent bounce has been consolidated, there should be another buying opportunity for longer term investors.

2. UG Healthcare: Weak 2Q19 Driven by One-Off Issue, If 10% NPM Achieved in FY20 Trades at 4x FY20 P/E

UG Healthcare (UGHC SP) showed good topline growth (+15%) but very weak bottom-line performance (-73%) in the second quarter of FY19 (financial year ending June). Weak bottom-line results were caused by delays and cost overruns in opening its latest factory expansion.

While the latest results are a setback I remain a believer in the UG Healthcare story. The eventual goal of reaching 100M SGD in revenues and getting a 10% NPM remains unchanged by the end of FY2020. Should the target be achieved the company trades at 4x 2020 P/E. Competitors in Malaysia trade at mid-teens multiples (or higher) so UG should deserve a significant re-rating the coming two years. Fundamentally, nothing has changed to alter my bear case  (0.24 SGD), base case (0.39 SGD) or blue-sky scenario (0.62 SGD) analysis. Liquidity remains an issue at less than 25K SGD/day.