In this briefing:
- Healthscope (HSO AU): Brookfield Makes Investors Wait, BGH Unlikely to Provide Material Upside
- Celgene and Bristol-Myers Squibb – Undervalued and Underappreciated
- Dr Lal Pathlabs: Pricing Pressure, Lower Earnings Growth Leave Room for Downside
- Samsung C&T: A Restructuring of Fashion Business Is Likely After the Stepping Down of Lee Seo-Hyun
- Celgene Acquisition by Bristol-Myers Squibb: A Call to Arbs
1. Healthscope (HSO AU): Brookfield Makes Investors Wait, BGH Unlikely to Provide Material Upside
Healthscope Ltd (HSO AU), Australia’s second-largest private hospital operator, noted today that Brookfield Asset Management (BAM US) is seeking the necessary internal approvals to submit a binding proposal by 31 January. We believe that Brookfield will come through with its binding proposal as the delays are not due to issues cropping up from the due diligence but due to ongoing financing negotiations with multiple banks.
Notably, there is renewed optimism that BGH-AustralianSuper could materialise with a superior proposal. AustralianSuper has three options available, which lead us to conclude that the floor is Brookfield’s Scheme bid with an option of a minor bump from BGH-AustralianSuper.
2. Celgene and Bristol-Myers Squibb – Undervalued and Underappreciated
A dismal 2018 for the pharmaceutical and bio-tech stocks seems far in the rear view mirror. 2019 began with a bang with two blockbuster deals in the pharmaceutical space within days. In this note, we discuss Bristol Myers Squibb’s Co (BMY US) acquisition of Celgene Corp (CELG US) and outline our view that investors should go long BMY.
3. Dr Lal Pathlabs: Pricing Pressure, Lower Earnings Growth Leave Room for Downside
- Dr Lal Pathlabs (DLPL IN) is the largest pathology chain in India and caters to the Rs 600 bn market growing at 15% Cagr. It is strongest in the lucrative NCR and Kolkata markets.
- Management has the best capital allocation track record in the pathology chain space. Network expansion mirrored patient volume growth.
- Patient volume growth has been the strongest among peers.
- However, revenue/patient has been declining as competitive pressure forced them to do away with price hikes for 2 consecutive years (2017-18). Increasing bundling of tests without adequate price hikes leading to sharp decline in revenue/sample.
- Expansion into eastern India with second central reference lab will drive down realizations
- Revenue growth deceleration and Ebitda margin contraction over FY17-18 looks to have stabilized now but are unlikely to revive.
- We expect Revenue and PAT Cagr of 15% and 16% respectively over FY18-21 against 21% and 34% respectively delivered over FY13-16.
- At CMP of Rs 996, Dr Lal trades at 36.1x FY20 EPS. Dr Lal’s steep multiples could see some compression with the lower growth trajectory and once the faster-growing Metropolis lists in the market. Our target price (30x FY20F) is Rs 827 implying 17% downside.
4. Samsung C&T: A Restructuring of Fashion Business Is Likely After the Stepping Down of Lee Seo-Hyun
Lee Seo-Hyun (age 46), the billionaire second daughter of the Samsung Group Lee Gun-Hee, recently stepped down from her position as the CEO of Samsung C&T (028260 KS)‘s fashion business. After resigning from Samsung C&T, Lee Seo-Hyun will become a chairperson of the Samsung Foundation, focusing on corporate social responsibility activities.
Among the various fashion brands, the most problematic has been the 8 Seconds SPA brand, which has been continuing to lose money. Despite big ambitions to make 8 Seconds as one of the leading global SPA brands, this plan has fluttered, especially in the overseas markets such as China. This strongly suggests that there could be a big restructuring of the company’s fashion business in the coming months.
Our NAV analysis of Samsung C&T suggests a range of 122k won to 139k won, which would represent an upside of 11% to 27%. In our NAV analysis, the investment stakes in affiliates were 19.2 trillion won, core business operating value was estimated at 9.9 trillion won (using 8x consensus OP in 2019), net cash of 2.2 trillion won, and Samsung Everland land value (post 50% taxes) of 1.8 trillion won. The range of value reflects the different discount for the quasi-holdco structure (20-30% discount).
5. Celgene Acquisition by Bristol-Myers Squibb: A Call to Arbs
On January 3, 2019, Bristol Myers Squibb Co (BMY US) and Celgene Corp (CELG US) announced a definitive agreement for BMY to acquire Celgene in a $74 billion cash and stock deal. The headline price of $102.43 per Celgene share plus one CVR (contingent value right) is a 53.7% premium to CELG’s closing price of $66.64 on January 2, 2019, before assigning any value to the CVR.
The logic behind the transaction is to create a biopharma powerhouse with leading franchises in oncology, immunology and inflammation (autoimmune diseases), and cardiovascular medicine. After completion, BMY will have six expected launches in the next 12-24 months representing over $15 billion in revenue potential, and an early pipeline that includes 50 high potential assets. In addition to amassing a powerhouse biopharma portfolio, the combination is expected to yield annual cost synergies of $2.5 billion by 2022.
Terms of the deal call for each CELG share to be converted into one BMY share and $50 cash, plus one tradeable CVR worth $9 if specific FDA approvals are received for three drugs by certain dates. The 1.0 BMY exchange ratio is fixed. Upon completion of the deal BMY shareholders will own about 69% of the combined company with former CELG shareholders owning the other 31%.
The deal is conditioned on approvals by both CELG and BMY shareholders as well as regulatory approvals that include the U.S. and the EU. Financing is not a condition. The companies expect the complete the deal in the third calendar quarter of 2019.
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