COVID-19 lowered sales by 5ppt in Q1 as increased demand for professional healthcare products was more than offset by the decline in demand for personal health products, particularly in China. Lower sales and an unfavourable product mix suppressed profitability. Considering that the virus has spread to the western world, Q2 is expected to be worse. Nonetheless, management anticipates a recovery in H2 and thus guided for modest sales growth and margin improvement for FY20. Robust order intake growth, particularly for ventilators, is a positive.
Companies: Koninklijke Philips
Impacted by slowdown across all three segments, Philips’ organic growth slipped to +3.3% in Q4 – D&T was held back by imaging and CC was affected by SRC. PH suffered due to negative growth in domestic appliances. Nonetheless, the FY19 revenue and profitability targets were achieved. Considering that domestic appliances does not fit into Philips health-tech strategy anymore, management is exploring strategic options – the proceeds could be channelled towards acquisitions in the healthcare space.
Led by double-digit growth in China and the robust performance in D&T and PH, sales accelerated slightly in Q3 19. However, order intake was flat due to softness in North America. Also, margins were held back by the adverse effect of tariffs, particularly in CC. As the mitigating actions (to counter tariffs) begin to bear fruit, we anticipate a margin advancement in Q4. Also, the c.100bp margin improvement target for FY20 appears within reach, given the positive growth trajectory in D&T and PH.
After a soft start in Q1, organic sales accelerated significantly in Q2 as mature markets and the Connected Care segment returned to growth. The D&T segment also reported a step-up in sales, while the Personal Health division continued with its MSD growth. With comparable order intake growth also witnessing acceleration, sales in H2 are likely to be stronger than in H1. Profitability should also improve further, led by operational leverage and efficiency initiatives.
Q1 was soft with negative lfl growth in Connected Care, decelerated sales growth momentum in D&T and a dismal showing in mature markets. But, Personal Health regained momentum and emerging markets posted double-digit comparable sales and order intake growth, which was a positive. Given the robust order book, particularly in Europe and North America, momentum should accelerate in the coming quarters and thus the FY19 financial targets should be met.
Royal Philips ended the year on a high with revenue as well as profits exceeding expectations – sustained growth in D&T overshadowed the slowdown in PH and CC&HI. Shareholders were rewarded handsomely with a 6% increase in dividends for FY18 and a new two-year €1.5bn share buy-back programme. Given the robust order intake growth (for D&T and CC&HI) and the continuous focus on new product launches (particularly PH), Philips remains on track to meet its financial targets for FY19.
At its Capital Markets Day, Royal Philips reiterated its financial targets of 4-6% comparable sales growth pa during FY18-20 and EBITA margin expansion of 100bp per year until FY20. Segment-wise, the revenue guidance for the Diagnostics & Treatment/D&T segment (c.39% of sales) has been upgraded to 5-7% pa (vs. previous guidance of 3-5%) while the EBITA margin target of 14-16% has been maintained (to allow for extra room for investments). The revenue and profitability guidance for the Personal Health/PH segment (c.41% of sales) has also been reiterated (5-7% organic growth and 17-19% margin). However, the top-line target for the Connected Care & Health Informatics/CC&HI segment (c.18% of sales) has been slashed to 3-6% (vs. previous guidance of mid to high single-digit growth), though the operating margin guidance has been maintained (14-16%). For the company as a whole, management has increased its productivity programme to more than €1.8bn by FY20 (vs. previous target of €1.2bn by FY19).
Q3 was a weak quarter. While the sales momentum was held back by a dismal show in the CC&HI segment and a slower than expected recovery in the Personal Health division, profitability was impacted by adverse currency movements and increased investments in sales and marketing. However, robust comparable sales as well as order intake growth in D&T should enable Philips to meets it financial targets for FY18. Nonetheless, the US-China trade war and Brexit remain the key headwinds for FY19.
Q2 was a mixed quarter wherein comparable sales were a tad below estimates while profitability met expectations. A slowdown in the PH segment, particularly in China, was the main reason behind the sales miss. However, we view this as a one-off and, given the seasonality of the business, we expect an acceleration in H2 18. Also, given a strong order book in D&T, we believe that the company would be able to meet its sales and profitability targets for FY18.
With comparable sales growth of 5.1%, order intake growth of 10% and margin expansion of 130bp, Royal Philips started FY18 on a promising note. Robust growth in the D&T segment led to the outperformance, despite deceleration in the PH and CC&HI segments. Given a strong order book, we expect the comparable sales growth to reach the middle of the guidance range of 4-6% in FY18. The target price resets higher by c.4%.
Royal Philips released its Q4 17 results which were slightly below the street’s expectations. Comparable sales growth came in at +4.6% (vs AV’s estimate: +5.1%), wherein growth territories gained 7% (c.33% of Q4 17 sales; led by Central/Eastern Europe, Middle East and China) and mature geographies grew 3% (c.67% of Q4 17 sales; North America: +c.5%, Western Europe: +c.4%). Segment-wise details as follows:
Momentum in the Personal Health/PH segment accelerated to +6.3% on a qoq basis (c.41% of Q4 17 sales) driven by high single-digit (HSD) growth in Health & Wellness and Sleep & Respiratory Care (SRC) businesses and mid single-digit (MSD) growth in Domestic Appliances and Personal Care divisions. For the third consecutive quarter, growth territories recorded double-digit (DD) growth (India: +DD; China: +HSD) while mature geographies grew MSD (North America: +LSD; Western Europe: +MSD).
The biggest positive was the 5.8% growth in the Diagnosis & Treatment/D&T segment (c.39% of Q4 17 sales), the highest in the last eight quarters. The uptick was driven by HSD growth in Ultrasound and MSD advancement in Image-Guided Therapy (IGT) and Diagnostic Imaging (DI) businesses. Geographically, the momentum was led by growth regions (+HSD with DD growth in China) while mature geographies were up MSD (North America: +HSD; Western Europe: +LSD).
After a strong Q3 17, growth in the Connected Care & Health Informatics/CC&HI segment decelerated to +2.3% (vs Q3 17: +8.4%; c.17% of Q4 17 sales) affected by LSD growth in Patient Care & Monitoring Solutions business (vs Q3 17: +DD; c.75% of CC&HI sales). However, the Healthcare Informatics business was up HSD. Region-wise, MSD growth in mature countries (North America: +HSD; Western Europe: -LSD) was partly offset by a MSD decline in growth geographies (the Middle East, Turkey and Africa: -DD; India: +DD).
Comparable order intake surged 7% during Q4 17 on the back of 12% growth in the D&T segment (mid-teen growth in North America and China). However, the CC&HI business witnessed a LSD slump as certain orders were postponed into FY18 (also impacted by the defibrillator business). Geographically, growth regions surged DD and mature territories reported LSD growth (North America and Western Europe: +2%).
After taking into consideration currency headwinds (-5.6%) and scope impact (+0.9%), the reported revenue was flat during the quarter (-0.1%). The adjusted EBITA margin reached 16.7% (+140bp yoy; c.2% below consensus) as the benefits of higher volumes and procurement savings were slightly offset by increased investments in advertising/promotion to support new product launches.
For FY17, organic revenue growth came in at +3.9% (vs guidance of 4-6%); however, if we exclude the drop in royalty income (agreement with a licensee was delayed), the HealthTech portfolio grew 4.3%. The adjusted EBITA margin improved 110bp during the year (vs target of 100bp) and, combined with a lower interest expense (due to bond redemption), resulted in earnings per share (from continuing operations) of €1.11 (vs €0.9 in FY16). Management has maintained the dividend at €0.8 per share for FY17.
With order intake growth of 6% in FY17, management targets comparable sales growth of 4-6% in FY18, outpacing the addressable healthcare market by c.100bp (estimated growth of 3-5% with LSD growth in the US and Western Europe and MSD/HSD increase in China). Profitability is expected to expand c.100bp p.a. in the mid-term.
While the Q3 17 performance was below street expectations (due to timing/phasing of new product launches and deliveries), we expect the strong order intake in D&T to bolster growth in the coming quarters. Moreover, new product introductions in the PH segment and steady revenue flow in the CC&HI business would further add to the momentum. The margin expansion story should continue to be driven by cost-cutting initiatives and an increasing proportion of solution/recurring revenue business in the total sales mix.
Royal Philips has released its Q2 17 results in which organic revenue came in below our estimates but profitability outperformed. Comparable sales were up 3.5% (vs AV’s estimate: +4.3%) primarily on the back of 4% growth in mature geographies (accounts for c.67% of Q2 17 sales; Western Europe: +8%; North America: +4%; other mature geographies: -7%). However, the progression in growth geographies slowed to +3% (vs Q1 17: +6%) as the high single-digit growth in China was partly offset by mid single-digit growth in Latin America. Segment-wise, the details are as follows:
Growth momentum accelerated in the Personal Health ‘PH’ segment (+6.2% vs AV’s estimate: +5% vs Q1 17: +5.2%; accounts for 41% of Q2 17 sales), benefiting from double-digit growth in the health & wellness business. Moreover, high single-digit growth in personal care and mid single-digit growth in the sleep & respiratory care business underpinned the top-line momentum further. Geographically, growth territories reported double-digit growth while mature geographies were up low single-digit.
Revenue in the Diagnostic & Treatment ‘D&T’ segment increased by 2.8% (vs AV’s estimate: +4%; accounts for c.39% of Q2 17 sales) as the mid single-digit growth in ultrasound and image-guided therapy ‘IGT’ businesses was slightly offset by low single-digit growth in the diagnostic imaging ‘DI’ business. Geographically, Western Europe (double-digit growth) and North America (up high single-digit) were the primary growth contributors, partly pulled back by a mid single-digit decline in growth geographies (particularly in the Middle East & Turkey, India and Africa).
Once again, the Connected Care & Healthcare Informatics ‘CC&HI’ segment was a disappointment (+0.7% vs AV’s estimate: +4%; accounts for 18% of Q2 17 sales). The segment was impacted by a low single-digit decline in the healthcare informatics portfolio, partly offsetting the low single-digit growth in patient care & monitoring solutions business. Both growth and mature geographies reported low single-digit revenue growth.
Comparable order intake increased by 8% yoy (vs Q1 17: +2%), driven by 7% growth in D&T (DI and ultrasound up high single-digit and IGT up mid single-digit) and 8% growth in the CC&HI segment. Geographically, mature territories recorded mid single-digit growth (North America: +9%; Western Europe: -8%; other mature geographies up low single-digit) while the order intake was up in the mid-teens in growth geographies (double-digit growth in Latin America and India; high single-digit growth in China).
Reported revenue increased by 3.9% after taking into consideration currency tailwinds (+1.3%) and scope impact (-0.9%). The adjusted EBITA margin reached 10.2% (+90bp yoy) led by an improving product mix, higher volumes and operational leverage. For FY17, management has reiterated its revenue (lfl growth of 4-6%) and margin guidance (adjusted EBITA +c.100bp).
As of 30 June 2017, Royal Philips’s shareholding in Philips Lighting stood at 41.16%. As loss of control is highly likely within the next year due to further sell-downs, Philips Lighting is classified as a discontinued operation as of Q2 17.
On 28th June 2017, Royal Philips announced the acquisition of Spectranetics Corporation, a US-based manufacturer of imaging systems and devices specialising in the cardiology space. The offer includes $38.5 per share in cash to Spectranetics shareholders (c.27% premium to the pre-announcement 27th June closing price), translating into an enterprise value of c.€1.9bn (including net debt of €220m). The deal will be funded through a combination of cash and debt and is expected to close in Q3 17. Spectranetics would be integrated in the image-guided therapy ‘IGT’ business (c.8% of sales) within the Diagnostic & Treatment ‘D&T’ segment (c.27% of sales) and management expects the transaction to be margin accretive by FY18 (both at the EBITA and earnings levels). The deal was closely followed by another smaller deal in the IGT space – On 29th June, Philips announced the acquisition of CardioProlific, a US-based private company developing catheter-based devices to treat peripheral vascular diseases. The product profile is complementary to Philips and Spectranetics portfolio. Financial details are not available.
In addition, Philips announced a new share buyback program worth €1.5bn to be carried out over the next two years (translates into c.46.1m shares at the current price; intends to cancel all of these shares). This should offset the dilution stemming from the company’s scrip dividends and long-term incentive plans.
Royal Philips released its Q1 FY17 results in which comparable sales growth came in below our estimates but profitability outperformed. The lfl revenue was up 2% (vs AV’s estimate: +3%), on the back of low single-digit growth in the HealthTech portfolio (+3% vs AV’s estimate: +5.5%; accounts for c.71% of Q1 17 revenue).
Within the segment, revenue in the Personal Health ‘PH’ division increased by 5.2% (vs AV’s estimate: +7%; accounts for c.30% of Q1 17 revenue) led by high single-digit growth in the health & wellness ‘H&W’ and sleep & respiratory care ‘S&RC’ business lines and mid single-digit growth in the domestic appliances business. Geographically, the division witnessed high single-digit growth in growth geographies and low single-digit growth in mature geographies.
Sales in the Diagnosis & Treatment ‘D&T’ division were up 2.1% (vs AV’s estimate: +4%; accounts for c.26% of Q1 17 revenue) on the back of low single-digit growth across all three business lines (diagnostic imaging ‘DI’, ultrasound and image-guided therapy ‘IGT’). Comparable sales growth was up mid single-digit in growth geographies while mature geographies showed low single-digit growth.
The biggest disappointment was the Connected Care & Health Informatics ‘CC&HI’ division (+1.5% vs AV’s estimate: +7%; accounts for c.13% of Q1 17 revenue) in which the low single-digit growth in the patient care & monitoring solutions ‘PCMS’ business was partially offset by the low single-digit decline in the healthcare informatics & services ‘HIS’ business line. Geographically, mature geographies reported low single-digit growth during the quarter while the performance was relatively flat in growth geographies (vs double-digit growth in Q1 16).
Sales were flattish in the Lighting segment (-0.4% vs AV’s estimate: -3%; accounts for c.29% of Q1 17 revenue) as the double-digit growth in the LED and home business was offset by the double-digit decline in the lamps business (in line with the industry trend).
Comparable order intake was up 2% yoy (Q4 16: +1%) as the mid single-digit growth in the D&T business was offset by low single-digit decline in the CC&HI business. Geographically, mature geographies showed low single-digit growth while order intake was flat in growth geographies (double-digit growth in China offset by double-digit decline in Latin America).
After taking into consideration currency tailwinds (+2.1%) and the scope impact (-0.3%), the reported revenue increased by 3.8% (vs AV’s estimate: +2.9%) during the quarter. The adjusted EBITA margin improved by 90bp (vs AV’s estimate: +60bp), primarily driven by higher gross margin, increased volume and overhead cost reductions. The HealthTech business witnessed an 80bp margin expansion in which the positive contribution from the PH (+150bp yoy) and D&T businesses (+190bp yoy) was slightly offset by the weakness in the CC&HI division (-30bp). For FY17, management has confirmed the full-year target of 4-6% lfl revenue growth and a margin improvement of c.100bp.
In April 2017, Royal Philips reduced its stake in Philips Lighting to 40.9% (vs 53.9% previously) by offloading 22.25m shares at a price of €28.8 per share (generating total proceeds of €641m).
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A number of REITs have the ability to thrive in current market conditions and thereafter. Not only do they hold assets that will remain in strong demand, but they have focus and transparency. The leases and underlying rents are structured in a manner to provide long visibility, growth and security. Hardman & Co defined an investment universe of REITs that we considered provided security and “safer harbours”. We introduced this universe with our report published in March 2019: “Secure income” REITs – Safe Harbour Available. Here, we take forward the investment case and story. We point to six REITs, in particular, where we believe the risk/reward is the most attractive.
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The announcement that Avon Rubber is to sell milkrite | InterPuls, its dairy division, to DeLaval Holding for £180m gross proceeds is strategically logical and financially compelling. The fit of dairy and defence has always looked slightly anomalous and the terms of the deal show that the opportunity to augment dairy through value-accretive deals is difficult given the scale of the business and opportunities. Management must now recycle the cash balances that will be created into Avon Protection, where there are a greater number of potential investments.
Companies: Avon Rubber
Brick and concrete products manufacturer Forterra has raised c. £55m gross in an equity placing in order to maintain its strong balance sheet and support the Group's continued investment programme. It was accompanied by, in our view, a reassuring trading statement which we believe is backed by yesterday’s brick industry data and comments from housebuilders, which suggest that demand has been recovering from its lockdown lows, before the PM’s promises to “build, build, build” housing and infrastructure.
Resilient Trading Update
Companies: Macfarlane Group
Successful businesses ‘never let a crisis go to waste’. Indeed since an otherwise strong Q1’20 was interrupted by COVID-19, Mpac has further streamlined operations, accelerated R&D and launched new remote equipment diagnostic/acceptance testing, virtual reality & other ‘Industry 4.0’ services.
The Norcros operating companies largely performed relatively well in challenging market conditions (in both the UK and South Africa) in FY20 though year end trading was affected by COVID-19 lockdowns, as flagged previously. The group’s financial position appears robust following management actions (including foregoing an FY20 final dividend) and well-placed to both contend with weaker near-term markets and the pursuit of market share gains from a position of relative competitive strength. Our estimates remain suspended at this time.
As flagged in the April trading update, Solid State’s FY20 results showed a 19.7% growth in revenues and 34.3% jump in adjusted profit before tax. Demand from the medical and food retail sectors is strong but weakness in the oil & gas and commercial aviation sectors related to the coronavirus pandemic is likely to result in lower year-on-year sales during Q2 and early Q321. While management sees potential for a Q4 recovery, the current range of FY21 profit outcomes is wide, so it is not providing guidance.
Companies: Solid State
The year-end trading update was encouraging, with expected results showing good YoY growth, modestly below but close to our earlier expectations. Trading has been resilient, particularly in safety critical areas such as its nuclear exposure, with some weakness being seen in oil & gas, where there is limited exposure. Two new contract wins in the nuclear sector have also been announced today. FY 2021 forecasts remain under review. With strong finances, the company is well positioned to maximise M&A opportunities, through its PIE strategy.
Revenue for FY 2020 is ahead of expectation and we adjust our forecast accordingly. Sales are growing at an impressive rate; >50% pa despite COVID-19 and the virus had no effect on the company’s ability to deliver projects with 23 new customers live in Q4. We note COVID concerns are causing some delay on contract decisions, and sales would have been even stronger but for that. These delays do lead to caution on FY 2021, and we ease back our forecasts on more prudent management guidance. However, with the recent £5m equity placing, PCIP has plenty of cash to continue to invest in rolling out its exciting secure payments proposition. This cloud-based solution can be deployed remotely and assists call centres in moving agents to WFH and still collect payments securely. The outlook remains very bright with continued rapid growth expected.
Companies: PCI Pal
The group has issued a trading update for the year ended 31 May 2020 highlighting an adjusted EBITDA of at least £11.5m which is close to the group’s original expectation, despite widespread disruption to operations in the second half. The statement notes ample liquidity headroom in excess of £10m with net debt (excluding IFRS 16 lease liabilities) reducing in H2 to £7.5m as planned. The Group’s order book and prospect pipeline remains strong overall and the update is accompanied by the announcement of two meaningful contract wins in the nuclear sector. A further significant positive development is the grant of outline planning permission for the conversion of the group’s 7 acre Hayward Tyler site in Luton into residential housing for up to 1000 dwellings. Whilst financial guidance for FY2021E remains withdrawn at this point due to on-going uncertainties around the impact of COVID-19, we see the group continuing to demonstrate good resilience, operating at close to normal levels, supported by exposure to multiple markets and a strong customer base that includes governments and their agents.
Marlowe delivered a strong performance during FY20A, with +7% organic revenue growth, and improved Adj EBITDA margins. Integration of acquisitions is progressing well, and with receipt of c£40m gross proceeds, Marlowe is well placed to accelerate the consolidation of its markets. We leave our forecasts unchanged and reaffirm our Buy rating.
Smart Metering Systems (SMS) has announced that it has emerged from the recent Covid-19 uncertainty in a strong financial position and taken the decision to return funds received from the Government under the Coronavirus Jobs Retention Scheme. Current net cash of £48m (not including furlough grant) is ahead of previous expectations and underlying profitability for the year to 31 December 2020 is expected to be in line with expectations prior to lockdown, despite the obvious interruptions to meter installation activity that it has caused. During lockdown essential emergency field engineering work continued and SMS completed the sale of a proportion of its meter asset portfolio for a gross cash consideration of £291m (£282m net). In March 2020, SMS announced that it would rebase its dividend to 25p (prospective yield 4.3%), index linked to FY24 and commencing payments in October 2020, quarterly thereafter. A phased resumption to meter installation activity commenced on 1 June 2020.
Companies: Smart Metering Systems
Successful K3 Capital placing to raise £30.45m (gross) at 150p to fund the £9.3m acquisition of Randd UK Ltd, an R&D tax credit specialist with an LTM EBITDA of c.£2.0m, with a margin of c.50% and revenues typically contracted for 5 tax years with many recurring thereafter, followed by future potential deals in SME exposed markets. K3 has established itself as an innovative company that is able to effectively gather, generate and mine large quantities of data in order to scale up M&A services to SMEs. Transferring these lead generation capabilities to adjacent SME markets can allow rapid growth from proven models, at scale.
Companies: K3 Capital Group
Salt Lake Potash has received commitments to raise A$15m through the placement of unsecured zero-coupon Convertible Notes to Equatorial Resources (ASX:EQX) and institutional investors. The Convertible Notes have been structured as deferred equity with zero coupon and mandatory conversion into equity at the lower of 45c/share or a 5% discount to any future equity raising of at least A$10m. These funds will enable Salt Lake Potash to continue to develop Lake Way to the project schedule through July as they finalise debt financing. Plant practical completion and first SOP sales remain on schedule for the March 2021 quarter. The debt financing process in its final stages and with an agreement expected to be executed within weeks.
Companies: Salt Lake Potash
The covid-19 pandemic has had a devastating effect on the share price of property companies, with 31% wiped off the value of their total market capitalisation during the first quarter of 2020.
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