strategic viewpoint on IVC, page-12

Morningstar’s valuation essentially assumes that, by FY2022, IVC will be able to generate 150m$ of operating EBITDA and will have managed to reduce its Net Debt to something like 230m$ (from its current 320m$).

At a 14.0x EV/EBITDA exit multiple (corresponding to a 4.00% FCF yield on EV), that would indeed give 14*150m$ = 2,100m$ Enterprise Value, i.e. 2,100m$-230m$ = 1,870m$ Market Cap, or 1,870m$/110m = 17.00$/share.

And, if that were the case, at the current SP of 12.55$ the expected annualised yield would be (17.00/12.55)^(1/4.5)-1 = 7.0% pa; adding 2.8% pa of current dividend yield, that would correspond to a +9.8% pa annualised total return over a 4.5-year period, which does look optically attractive.

This sort of outcome is not unreasonable, as it essentially assumes that IVC will simply resume doing what they should always have been doing, i.e.

1) Reconquer loss market share and grow their revenue line at no less than the compound rate of a) the annual death growth rate and b) CPI inflation.

2) Keep costs growing roughly in line with CPI inflation, thereby gradually improving EBITDA margins.

3) Use retained earnings to reduce Net Debt (before contemplating any new acquisitions).

The only problem is that, as things currently stand, this looks very much like an upside, “all-goes-well” scenario, rather than a base-case valuation.

On the other hand, it is also not unreasonable to envisage a “downside” scenario where EBITDA simply stagnates around the current ~120m$, Net Debt gets only reduced to say 275m$, and the market re-rates the stock down to a 10.0x EV/EBITDA multiple. That would give 10*120m$ = 1,200m$ Enterprise Value, i.e. 1,200m$-275m$ = 925m$ Market Cap, or 925m$/110m = 8.40$/share.

In this case, at the current SP of 12.55$ the expected annualised yield would be (8.40/12.55)^(1/4.5)-1 = -8.5% pa, or -5.7% pa total return (including the current dividend yield) over the 4.5-year period.

If we take something in the middle as a “base-case” scenario, i.e. operating EBITDA growing to something like 135m$ by FY2022, and a 12.0x EV/EBITDA multiple being applied (which still corresponds to a ~20% premium vis-a-vis current broad market valuations), then the expected annualised total shareholder return over the 4.5-year period would be in the region of +2.1% pa.

And that, regrettably, is less than what a long-term government bond currently pays, but with a lot more market and operational risk.

So, while I do fundamentally like the defensive characteristics of this business, there is just not enough margin of safety at current price, for me to want to initiate a position.

Hope this helps, and good luck to all holders.