@madamswer with reference to your calculation of 8.0-8.5x EV/EBITDA, did you annualised the $621m EBITDA quoted in the trading update?Noting this includes $300m of covid related revenue.@Klutch,
No, I didn't annualise the $621m number for the very reason that, as you say, it is still Covid-elevated.
I used an EBITDA figure of around $1.75bn, which is about $115m lower than $1.86bn, the annualised $621m number, and implies a $57m (or 9 %) reduction in EBITDA over the each of the remaining two, 4-month periods of the financial year (that ~$57m difference representing a rough estimate of the marginal EBITDA contribution from the $300m of additional Covid Revenue, on the assumption that the Covid-related Revenues discontinue with effect from end of December 20220 (which they probably won't).
Convoluted story, I know, but this is a convoluted year for the company, with lots of moving parts.
What I also did (but didn't include in my earlier post because I thought it would an an extra layer of complexity) to get around the limitations of the above kind of deterministic forecasting during unusual business conditions, is I reverse engineered the problem, by solving for the sort of level of "normalised" earnings being priced in by the current valuation of the company.
And what I also did - as cross reference - is I took a stab at what FY2024 (presumably "clean" year, free of abnormal Covid-related business) would need look like to support the current valuation, based on the appropriate valuation multiples of the stock.
In this case, I looked at precedent EV/EBIT multiples.
(
EV, to capture the fact that the company is approaching the point of being debt-free, and
EBIT because the adoption of AASB16: Lease Accounting has the effect of dramatically overstating post-2019 EBITDA compared to history).
As can be seen from the chart below, excluding the clear Covid-related anomalies in FY2021 and FY2022, SHL's
EV/EBIT multiple have ranged between the low- and high teens, with an
average of between 16x and 17x:View attachment 4964407When it comes to applying an appropriate valuation multiple today, is worth noting that over the entire pre-Covid period, SHL's Net Debt to EBITDA and Net Debt-to-Equity were much elevated, consistently between 3.5x to 4.0x and 50% to 70%, respectively:
View attachment 4965415This meaningfully higher historical gearing of the balance sheet means that the financial risk was obviously higher in the past than it is today, also, that the valuation multiples over that period would have incorporated that elevated financial risk.
Which suggests that today, with the company now effectively debt-free, a valuation multiple at the upper half of the historical range can by justified - i.e., say
18x EBITAt the current EV of around $15.0bn, that
solves for an EBIT of around $820m-$840m.For context, that compares with FY2021 and FY2022 EBIT of $1.9bn and $2.2bn, respectively, so the market is effectively pricing in a very significant contraction in "normalised" EBIT, from the Covid highs.
And for even more relevant context, in the year immediately prior to Covid, i.e., FY2019 , the company made EBIT of
$810m In other words, the valuation-implied EBIT in FY2024 of around $820m-$840m suggests that EBIT has, on a alike-for-like basis, risen by a mere 2.5% over the five years between FY2019 and FY2024 (that's 2.5% in total
nominalterms,
notan compounded annual growth rate).
Objectively, that is a highly unlikely outcome, given the company's historical ability to grow organically (even at modest rates).
And even more so given the $1.5bn worth of acquisitions that were made in the intervening period. Why, even if those collective acquisitions were conducted on overall EV/EBIT multiple of an extravagant 20x, that's an extra $75m of EBIT that should exist in FY2024 that wasn't there in FY2019.
So, at the company's current valuation, the market is effectively saying - all other things being equal - that the core business has contracted over the past 5 years.
That can't possibly be correct.
Viewed yet another way:
In FY2019, the last "clean" result, the company was earning EBIT of $810m
Organic growth, even at a modest 2%pa, would have added EBIT of $80m to $90m.
Acquisitions, conducted at 15x EV/EBIT multiple, would have added a further $100m.
So I think the EBIT run rate for the company - excluding any Covid free kicks - is currently travelling at around
$1.0bn.
And for that I'm paying an EV of $15bn, so
15x EV/EBIT.For a business which precedent tells me should be valued closer to 18x-20x EV/EBIT
On my Reward-Risk Matrix, that definitely warrants a spot in my portfolio.
.
(20min delay)
