Siemens and Healthineers: Valuing the IPO
- Based on Discounted Cash Flow analysis, and using the forecast in Exhibit #4 and DB report in Appendix #1, what do you think the company is worth as of April 2018? What competitive assumptions are built into the forecasted cash flows?
- Would you recommend purchasing shares at the top of the planned offering range (which was close to the share price of 32.7 EUR per share, as of April 2018)?
EXHIBIT 4 Discounted cash flow analysis During the transition period, percentage values are gradually transitioned over ten years from their values in 2022 to the ones in 2032. Changes in highlighted cells will flow through to the cash flow analysis. 3 Solid financial position and growth potential: Defensive above-GDP growth potential, high share of recurring revenues, healthy margins, and strong cash flows. End markets are typically characterized by structural growth in the midsingle digit percentages on average. Barriers to entry are significant given strict regulatory requirements and the complexity of devices, while volatility of the business is reduced further, with more than half the sales ( 57% in fiscal 2017) from recurring revenue streams such as services, reagents, and consumables. 4 Scope for sales acceleration and further margin expansion: Healthineers has delivered fiscal 2015-17 sales and adjusted profit CAGRs of 3.3% ( +3.8% organic) and 6.4%, respectively, with the adjusted profit margin expanding from 17.2% (fiscal 2015) to 18.3% (fiscal 2017). Double-digit earnings growth in Imaging and Advanced Therapies was mitigated by low single-digit earning declines in Diagnostics. Healthineers has seen below-market growth and below-peers' margin in its Diagnostics segment in recent years, mainly due to a suboptimal product offering and organizational setup, in our view. However, management has addressed these issues and significantly invested in the franchise, with its recently launched Atellica platform at the heart of potentially improving performance going forward. Atellica is a fully automated, high throughput, modular diagnostics platform, mainly targeting the immunoassay and clinical chemistry markets. It offers increased efficiency, reduced complexity, a comprehensive test menu, and will allow Siemens Healthineers to consolidate its offering from five to one primary instrument platform. Appendix 1 Valuing Healthineers In late April 2018, Franz Gerber - a newly hired buy-side analyst for a large institutional investor in Germany - was interested in Healthincers. Would it be a good addition to the investor's portfolio? Franz was exploring increased exposure to health care, but was the stock a good buy at EUR32.70 per share (its market price on April 20,2018)? As a head start on developing his own valuation models, Franz examined sell-side reports that equity analysts had issued following the IPO. One by Deutsche Bank (DB) looked like a promising place to start. Deutsche Bank analysis In its April 25 report, DB initiated coverage with a buy rating. DB stated a target price of EUR36.00, based on an average of a multiples valuation and a discounted cash flow analysis. Deutsche Bank's views on Healthineers Siemens Healthineers is a global technology supplier to the health care industry, supporting customers along the continuum of care. It enjoys leading positions across all of its segments: Imaging (59\% of FY2017 sales), Diagnostics (30\%), and Advanced Therapies (11\%). Given its market and innovation leadership in Imaging and Advanced Therapies, a new platform launch in Diagnostics, and structural cost savings potential, we expect sales growth to gradually accelerate and margins to expand over time. We estimate Siemens Healthineers' total addressable market at FUR50 billion and growing at 3% to 5%. Entry barriers are high and markets are largely consolidated, while growth is structural and defensive, in our view. The company's revenue base is well diversified (products, regions, customers) and builds on global number one positions in Imaging ( 31% market share) and Advanced Therapies ( 32% ), and a global number two position in Diagnostics (15\%). More than half of the sales are recurring and cash flows are strong, supported by healthy operating margins (>17\% of sales), as well as low capex (3%) and Net Working Capital (20%) requirements. DB noted key points undergirding its analysis of the company: 1 Global heallh care powerhouse: Considerable scale and reach, well diversified across products, regions, and customers. 2 Leading positions in large and structurally growing markets: Number one or two player in most of its businesses
