Orpéa: Aiming for margin growth and shareholder returns
Fair Value EUR36 vs. EUR33 (price EUR25.70) BUY
In our view, Orpéa is on the verge of a major change in stock market perception. Indeed, after 10 years of acquisitions financed by debt and earnings-dilutive operations for existing shareholders, the company's management team now has new strategic aims focused on: 1). improving its operating profitability from one period to the next, 2). robust growth in FCF, 3). a decline in debt ratios, and 4). shareholder returns in the form of dividends. For all these reasons, Orpéa is one of our Top Picks in the Healthcare sector for Q2, with a FV of EUR36 giving 40% upside potential.
Focus on margins. The rising proportion of operational beds in Orpéa's portfolio (currently 74% vs. 80% in 2014e) is set to automatically widen the underlying EBIT margin by around 50bp a year to reach 15% in 2014 (vs. 13.2% in 2011). The combination of these new beds becoming operational and a more selective acquisitions policy should help reduce the number of beds in construction/renovation weighing on the group's margins to 8,600 in 2014 (vs. 9,500 at end-2011).
FCF generation and improvement in debt ratios. The improvement in operating profitability, together with the reduction year after year in capex for the construction/renovation of beds in the pipeline, should enable the group to post positive FCF as of 2013. We believe net debt should remain stable at EUR1.6bn and then decline significantly as of 2014. All debt ratios are set to improve as of 2012.
Shareholder returns. Faster asset disposals against a beneficial backdrop for Healthcare real-estate is also set to improve the group's cash positions while reducing the risk of undertaking earnings-dilutive financing operations for existing shareholders. As of this year, cash is to be returned to shareholders on a lasting basis via a significant dividend payment representing a pay-out of 33%.
The stock is far from overvalued. Based on a restated EV/EBITDA multiple of 5.7x 2013e (assuming real-estate is sold off), Orpéa is trading in line with peers, which in our view ignores the group's superiority in terms of its organic growth/margin couple. Q1 sales are out on 3rd May.