Healthineers SHL.DE
March 24, 2018 - 10:56pm EST by
2018 2019
Price: 31.59 EPS 1.75 1.93
Shares Out. (in M): 1,000 P/E 18.1 16.5
Market Cap (in $M): 31,590 P/FCF 18.1 16.5
Net Debt (in $M): 6,672 EBIT 2,521 2,697
TEV (in $M): 38,262 TEV/EBIT 15.2 14.2

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Siemens IPO'd their healthcare dividivsion in March of 2018. It was a partial IPO (~15%) but overtime they will sell the rest of their stake. While I don't think this is a screaming bargain -- it is attractively priced with the potential to compound for several years. Below I will give a brief overview of the business and the key reasons why I think it makes for an interesting investment. As it is a new business, I don't have a detailed financial model, but will pasted below some simple segment financials to at least give a sense for the size and scope of the segments.



Siemens Healthineers operatins in three segments:


1) Imaging Equipment - this is primarily imaging eqipment. Think xrays, CTs, MRIs, Ultrasounds, etc. the primary competitors are GE and Philips. It is primarily an oligopoly.

2) Advanced Therapies -- selling imaging equipment to labs and surgical centers that do advanced, minimally invasive procedures. It remains an open diligence question whether it is actually the equipment that Healthineers sells that is truly advanced or just the labs that just using equipment for advanced therapies. IE, the "advanced" might be a misnomer. Similar competitors to Imaging Equipment.

3) Diagnostics -- Healthineers sells testing equipment and reagents (primarily on a reagent rental basis) to hospitals and labs. The main compeitors here would be Abbott and Roche. This is a 90% recurring business do to the nature of the reagent usage / rental basis.

Healthineer's imaging equipment segment is positiong to do well for the forseeable future. They provide key equipment to radiology deparemnets which are the cornerstone of the future of medicine. Radiology departments are a key profit centers for many hospitals and also have many other key properties. 1) they are critical in the chain of care - quickly assessing patients can mean greatly shortening a patient's stay at a hospital which can reduce hospital and total system costs enomorously. 2) Advances in imaging are enabling advanced, minimarly invasive therapies that can enable both better patient outcomes, lower costs, and shorter hopsital stays. In the world of value-based outcomes/metrics -- this is good for hospitals, the medical system, patients, Healthineers, everyone. Even though the US and Europe are largely mature medical markets, radiology is growing mid single digits, and emergering markets are growing faster due to the points just mentioned. 


There are are smaller players besides Healthineers, GE, and Philips, but overtime, the big three have been consolidating. I would't expect a massive margin opportunity here -- but there is underlying market growth and it is a fundamentally pretty good business. The same holds true for Advanced Therapies.


The big opportunities for margin expansion is in the Diagnostics segment. This segment historically was sub scale adn was put together from the cobbling together from the technology combined from several historical acquistions. As a result, Siemen's system was sub part and sub-scale and much less efficient than the offering from Roche and Abbott. However, Siemens has a new testing platform called Attellica which, apparently is on part with the Roche and Abbott systems and should give Healthineers a good shot at driving meaningful improvement in their business both in terms of revenue growth and meaningful margin improvement. 

In the roadshow lunch in March 2018 management said they thought they could get margins from 14% to 19% -- and overtime they should be able to do much better.

These diagnostics businesses, when run well, can be great businesses. They are highly renewable and generate a ton of free cash flow. It remains to be seen if the Attellica platform will be a success - but it is unlikely to be worse than the existing paltform.




On a trailing basis, Healthineers came out at around 20x on a PE basis and has a pretty good balance sheet. Based on the postive underlying tailwinds of the imaging / radiology business and the potential upside in the diagnostics business, the should be able to grow earnings at high single digits, low double for several years. The industry is basically an oligopoly -- and given that it has spun from a much larger organization -- there is likely the chance for greater cost cuts.


as mentioned before, while not screamingly cheap, I think this provides the chance to compound attractively and if things go very well with Diagnostics you could do very well. Some historical figures are pasted below to get a sense for the business. Apologies for the formatting but it doesn't paste well.






          FYE end Sept          
      2015 2016 2017 2018        
SEGMENT REVENUE                
  Imaging 7,382 8,007 8,216          
  Advanced Therapies 1,447 1,460 1,519          
  Diagnostics 4,138 4,138 4,162          
Total Segments 12,967 13,605 13,897          
Reconciliation to Combined Financial Statements -31 -58 -101          
Healthineers Total Revenue 12,936 13,547 13,796          
Revenue   12,936 13,547 13,796          
Cost of Sales -7,867 -8,080 -8,034          
Gross Profit   5,069 5,467 5,762          
Research and Development Expenses -1,055 -1,145 -1,253          
Selling and General Administrative Expenses -2,109 -2,206 -2,222          
Operating Income 1,905 2,116 2,287          
  Other Operating Income 79 19 22          
  Other Operating Expenses -21 -18 -19          
  Income from Investmetns Accoutned for Using the Equity Method, Net      
Other Operating Income, Net 67 7 12          
  Interest Income 19 14 12          
  Interest Expenses -117 -216 -267          
  Other Financial Income (Expenses), Net 2 -3 -          
Financial Expenses, Net -96 -205 -255          
Income before Income Taxes 1,876 1,918 2,044          
  Income tax expense - Calc'd 31.10% 30.80% 29.40%          
Income Tax Expense -584 -590 -600          
Net Income   1,292 1,328 1,444          
RECONCILIATION TO EBITDA 2015 2016 2017          
NET INCOME 1,292 1,328 1,444 * German tax rate of ~31%    
Add-Back: Income Tax Expense 584 590 600          
Add-Back: Financial Expenses 96 205 255          
Add-Back: D&A and Impairment of Other Intangible Assets 252 259 230          
Add-Back: D&A and Impairment of PP&E 312 332 342          
EBITDA   2,536 2,714 2,871          
Add-Back: Severance Charges 62 61 57          
Adjusted EBITDA 2,598 2,775 2,928          
Of which:                  
  Imaging 1,445 1,721 1,771          
  Advanced Therapies 287 301 348          
  Diagnostics 846 743 802          
  Central Items & Reconciliation 19 11 8          
      2,597 2,776 2,929          
RECURRING REVENUE                
Revenue from Services 3,600 3,785 3,936          
Revenue from Consumables and Reagents 3,748 3,754 3,801          
      7,348 7,539 7,737          
  Pct of Diagnostics from Consumables and Reagents 90.60% 90.70% 91.30%          
  Pct of Equipment and and Advanced Therapies from Services      
Capital Expenditures                
Additions to Intangible Assets and PPE 356 424 466          
  Additions to intangible assets 191 220 216          
  Additions to PP&E 165 204 250          
      356 424 466 * 500m planned capx    
NET INCOME 1,292 1,328 1,444          
Add-Back: Severance Charges (pre-tax) 62 61 57          
Adjust: Severance Charges (tax impact) -19 -19 -17          
Amortization of (other) Intangible Assets Acquired in Business Combinations (pre-tax) 180 179 147
Adjust: Amortization) -56 -55 -43          
Adjusted Net Income - Rptd Adjusted 1,459 1,494 1,588          
NET DEBT RECONCILIATION (as of Dec 31, 2017)                
Cash         321          
Cash Equivalents     5          
Trading Securities     -          
Liquidity (A + B + C)     326          
Current Financial Receivables     5,005          
Current Bank Debt     48          
Current Portion of Non-Current Debt     8          
Other Current Financial Debt     8,255          
Current Financial Debt (F + G + H)     8,311          
Net Current Financial Indebtedness (I - E - D)     2,980          
Non-Current Financial Receivables     1,406          
Non-Current Bank Loans     -          
Bonds Issued     -          
Other Non-Current Loans     5,098          
Non-Current Financial Liabilities (L + M + N)     5,098          
Net Financial Indebtedness (J - K + O)     6,672          


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


Attellica system getting margins in Diagnostic segment 14% --> 19%

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