- FY17 underlying profit was solid and in line with guidance and our estimate, underpinned by continued strength in the domestic business helping to offset wellflagged ROW challenges.
- The domestic business has shown strong "resilience", despite industry volatility, with funding secured, cost-out leverage evident and brownfield gains, but 2H sales slowed and margins contracted more than historical seasonality.
- Importantly, while we expect continued domestic business strength and see upside from procurement and retail pharmacy expansion, continued ROW headwinds limit strong earnings gains and is likely to impinge on the typical 'beat and raise' cycle.
- We have modestly adjusted our FY18-20 earnings, with our DCF/SOTP target price decreasing (target price for Morgans clients only). We move to Hold.
Brief results analysis
Earnings growth across all divisions; but Aus the standout
FY17 core NPAT was solid and in line with guidance and our expectation (A$542.7m,
+12.7%, Consensus/Morgans A$541m), on revenue that was slightly behind (A$8,705m
+0.2%; Morgans A$9,010m; consensus A$9,032m). Underlying EBITDAR was up 2.2%
to A$1,706m, with margins expanding 37bp to 19.6%.
All divisions contributed to
earnings growth, but only Australia/Asia stood out for EBITDAR margin uplift, mainly on
operational efficiencies (earnings +13%, margins +95bp to 17.9%; France earnings
+0.6%, margins +6bp to 20.06%, challenging tariff environment; and UK earnings
+1.8%, margins -69bp to 25.4%, lower-yielding NHS patients, tariff cuts and nurse
shortage, albeit "well controlled" in 2H).
OCF (A$882m, -2.5%) declined on softer WC
and higher tax provisions, with cash conversion (c92%), dividend mirroring underlying
profit (134.5c, +13%; FF; c50% payout ratio) and B/S solid (2.2x ND/EBITDA; cA$500m
headroom) to support brownfields (A$200m targeting) and other growth opportunities.
FY18 guidance calls for EPS growth of 8-10% (282-288cps).
Diversity supports domestic business, but ROW a near term drag
CEO Craig McNally’s debut saw him flag no change to a “consistent” strategy, confident
of moving in the "right direction" underpinned via sound industry fundamentals and a "powerhouse" domestic business showing strong "resilience" despite industry volatility,
given numerous attributes (eg portfolio scale, geographic diversification, balanced
While no reduction in volume growth was flagged, we note H/H sales
slowed (-370bp) and EBIT margins contracted (-175bp to 13.2%) more than typically
seen with historical seasonality.
Nevertheless, we are confident management can
deliver on its guidance and expect gains from procurement and retail pharmacy
expansions to be supportive, but an increasing near term ROW drag will likely keep
growth in check.
Modestly lowering earnings outlook
Our FY18-20 core NPAT estimates decline up to 0.3%, mainly on lower revenue
assumptions, partially offset by lowered D&A, interest expense and tax rate (c30%).
Investment thesis; Moving to Hold
While core fundamentals remain unwavering and the domestic business strong,
intensifying ROW headwinds are likely to handicap strong near term outperformance.
Our DCF/SOTP-based price target declines and we move to Hold.
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