Jefferies broker update27 Nov 2015 08:56
Sinclair IS Pharma (SPH LN): First Stab at Re-focused Entity: It's a Beauty; Boosting PT to 60p
Rating BUY
Price Target 60.00p (from 45.00p)
Price 37.75p
Key Takeaway
Disposing of all products outside aesthetic dermatology leaves a more focused company with a leaner structure and improved growth trajectory. The attractive deal terms, in our view, boost the PT +33% to 60p. Importantly the Board's Nov '14 strategic review is still ongoing, with the new entity potentially a more attractive target for suitors. Pro-forma on 9x and 6x EV/Adj-EBITDA FY2017-18E with a c.40+% EPS CAGR, valuation remains attractive, hence our Buy.
Executing aesthetic derm focus: Sinclair has disposed of all its products outside aesthetic dermatology to Alliance Pharma for £132m cash; an attractive valuation given recent sales pressures and somewhat fragmented portfolio, in our view. Key benefits beyond greater focus include: (1) simplified corporate structure; (2) debt facility repaid for pro-forma Net Cash c.£82m; and (3) improved sales growth trajectory. Aesthetic products performed strongly in FY15 at +35% LfL despite inventory destocking and S Korea headwinds. These challenges have been addressed but re-basing inventories will likely curtail FY16E sales, with +8-25% LfL targeted (JEFe +18%) from c.+40% in-market performance.
Strategic review ongoing: There was no update on the Board's progress but a number of parties are still in discussions. We believe the new leaner, focused entity is likely to be more attractive for potential suitors, being easier to integrate and value.
Hiking PT +33% to 60p: Our higher PT largely reflects the attractive deal terms for the disposal. Pro-forma 60p/share suggests an EV around £215m implying 4.2x and 3.4x Revenues, or 19x and 13x EBITDA, in FY17E and FY18E, respectively, which we view to be still relatively conservative.
Attractive growth profile: We see a strong strategic rationale in focusing on a portfolio of dermal fillers, in addition to Silhouette for minimally invasive face-lifts. These brands form a unique aesthetic dermatology franchise, in our view, which with targeted S&M efforts should drive substantial operating leverage with the promise of long product lifecycles.
Valuation/Risks
Our 60p per share Price Target is derived by applying an equal weight to our DCF and a blended FY2021E multiple, capturing both the long-term trends and the context of the sector, in our view. Risks: (1) execution risk around marketing key brands and cost control; (2) slower emerging market growth; and (3) pipeline disappointments.
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