Here, a peculiarity is that only 15% of equity capital was put on sale two years ago, while the Siemens mothership kept — as of now — the remaining 85% under control. Popular in Germany, these partial IPOs enable large conglomerates to monetize their assets in a timely fashion, and their subsidiaries to raise capital on their own.
Helthineers employs 52,000 people over 70 countries, and generates €14.5bn in revenue. Business is split into three segments: Medical Imaging (€8.9bn in revenue) sells scanner and radiography equipment, among others; Advanced Therapies (€1.6bn) develops high-precision surgical equipment, as well as linear particle accelerators used for radiotherapy treatments; finally, Diagnostics (€4.1bn) supplies laboratories with a comprehensive and integrated set of capabilities.
Remarkably, within the first two segments the company operates as an oligopoly with GE and Philips. Growth rates outmatch GDPs, driven to a large extent by thriving demand from China and the Middle East. Margins are high and returns on capital employed highly rewarding, for business is mature and protected by unassailable barriers to entry.
The Diagnostics business remains more fragmented and competitive. Margins are less juicy but a total addressable market of €30bn exceeds Medical Imaging's (€19bn) and Advanced Therapies' (€3bn). Management intends to consolidate Helthineers's geographies and portfolio of services portfolio into a dominant offering — scale will make the difference — alongside the costly but promising launch of the Atellica suite.
Sluggish growth in Europe has been offset by continuing dynamism in North America, Middle East, Asia and the Oceania regions. Of course, the company's fortunes remain directly tied to government spending in healthcare, in particular where equipment rate lags behind — precisely the opposite of what happens in Europe, where hospitals are well provided and social security systems on the brink of insolvency.
On the financial level, the restructuring plan deployed simultaneously with the IPO led to a staggering margin expansion (16% last year) in a short period of time. Going public certainly helped management to implement though but needed decisions — such as trimming redundant workforce — and deal with Siemens' redoutable unions.
Improved profitability should also cast light upon the company's excellent foundations. In addition to the high barriers to entry, all segments deliver recurring revenues and earnings — in Imaging and in Advanced Therapies with software licences, spare parts and maintenance services, and in Diagnostics where customers buy steady volumes of reagents and consumables.
Balance sheet is solid, with most of the loans (€4.1bn out of €4.5bn in total) granted by majority shareholder Siemens on preferred terms, and operating earnings covering interest charge by a factor of ten. So far, half of current indebtedness finances working capital requirements, while the other half was used for acquisitions.
One should expect Siemens to progressively withdraw and let Helthineers tap the bond markets. Additional capital will be required, for management has high acquisitive ambitions, and a plan to replicate within the Diagnostics business the excellent competitive positions that have been established in Medical Imagery and Advanced Therapies. That strategy has a cost.
Shares trade at x23 2019 earnings, and x21 expected earnings by 2022. Albeit typical of a mature business growing slightly above GDP, these valuation levels give little credit to analysts' guidance — surveyed in real time by MarketScreener — which has been uplifted following the takeovers of ECG Management Consultants and Corindus in the United States.
With GE in trouble and Philips announcing its desire to solely focus on its healthcare business, it is obvious that management intend to get an upper hand with cross-support from financial markets and its former parent company, which next moves will be interesting to track. In effect, in a comparable case of partial IPO, Bayer took advantage of a momentous valuation frenzy to unload its 70% stake in Covestro.
Siemens acting likewise would warrant a second look at Helthineers' investment case, whereas the former parent staying on board would signal that things go according to the plan.