In their recent half yearly report, management offered 2024 FY EBITDA guidance between $1.7b and $1.8b and then further qualified that prediction by stating that the profit would be "more likely towards lower end of guidance range". When I build a result using $1.7b as the EBITDA for the 2024 financial year I worked up a Profit before Tax of $886m and, after applying a tax rate of 27%, again from their half yearly report, I suspect that EPS may settle around $1.30 to $1.35 for the current financial year. A share price of $26.50 suggests a P/E ratio of about 19 to 20 which is the maximum I would pay for this business.
Mmmm, I very much doubt they'll record EPS of 135cps for FY2024.
I think closer to 120cps is on the cards:
That means a P/E of around 22x.
So, not mouth-watering valuation, despite the massive share price fall over the past few years.
But while I sense this is the way the market is thinking, it is a bit moot because I believe it is the wrong way to assess SHL as an investment opportunity.
For starters, FY2024 is almost done and the market is a forward-looking beast, so I think one needs to start looking at FY2025 numbers, which will see a meaningful uptick in EPS, to 140cps-145cps, and possibly even 150cp. (JH2024 will have EPS of around 75cps to 80cps, so annualising that, less an adjustment for the usual seasonality between 1H and 2H).
On that basis, the prospective P/E is around 19.0x, which is a tad below the long-term average (excl. Covid distortions):
So I think the stock is now about fairly valued on a P/E.
But even that I think is a partly-flawed way to view the stock, reason being that the company is total in a totally different balance sheet position compared to any other time in its history, thanks to the Covid-cash flow bonanza which basically eliminated SHL's net debt:
I therefore think that SHL should be valued on an EV multiple basis.
So, on a prospective (FH2015) EV/EBIT of around 13.5x, compared to the long-run average of between 16x and 17x, I feel the stock now displays a degree of margin of safety:
While I believe there is a more than 50% chance that the stock is not yet ex- its downgrade cycle, I feel it is now already largely pricing in any residual downgrades. Sure, there might be a bit of ongoing pressure from quant models as the downgrade cycle enters its exhaustion phase, but from a valuation appeal standpoint, it feels to me that we are close to the point of "Sell the Rumour; Buy the Fact".
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SHL Price at posting:
$26.47 Sentiment: None Disclosure: Not Held
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