Corporate actions to raise Fresenius
Recent spikes in market volatility have served as a helpful reminder of the importance of defensive and safe-haven assets in any portfolio. And in the hunt for safety and value, investors could do worse than German manufacturers of medical equipment – a sector renowned for its reliability and excellence, even if it requires careful navigation.
- About to undergo a radical restructuring
- Valuable niche in biosimilars
- The loss of the conglomerate discount should add value
- No Buyer Warranty for FMC
- pile of debts
With this in mind, one of the most interesting (albeit slightly confusing) situations in European markets today is the entangled relationship between Fresenius Medical Care (DE:FMC) and Fresenius SE & Co KGaA (DE:FRE). We focus on the latter, the parent company of a highly diversified medical devices and services conglomerate. Why Fresenius should interest investors now is that it is the latest in a long line of German conglomerates to figure out how to generate more value for their shareholders by restructuring their operations. There is a tacit admission, even within Germany’s notoriously conservative corporate culture, that persistently low stock valuations and inefficiently deployed capital are no longer acceptable.
After years of falling share prices and slow sales growth, the Fresenius Group finally seems ripe for the kind of corporate action that could offer better returns.
The first and most obvious of these relates to the group’s management of its valuable asset, Fresenius Medical Care. For the sake of clarity, it should be noted that although independently listed on the German stock exchange, FMC is effectively controlled by Fresenius via a 37% block stake, which is why it is also reported as a division in the report. parent company’s annual report, despite reporting its own set of independent accounts.
Although unusual in the UK and the US, cross-shareholdings between nominally independent companies are more common in continental Europe and Japan. For Fresenius, the parent company, and its subsidiary, there is a valid argument that the current ownership structure is a hindrance. As a result, the future of participation is the most obvious starting point for any corporate reorganization.
Comparison between parent company and subsidiary Fresenius
|Teleprinter||name||Price||Market capitalization (€bn)||ROCE (%)||PEG||Earnings yield (%)||Gross gearing (%)||Price at NAV||%chg since the beginning of the year||PE|
|FCM||Fresenius Medical Care AG & Co KGaA||€59.71||14.9||6.8||1.2||5.5||104.9||1.4||4.28||18.2|
|FR||Fresenius SE & Co KGaA||€32.14||18.2||8||4.4||9.9||152.9||1.1||-9.14||10.1|
Price assets on the to block
There are signs that management is finally accepting this premise. During the company’s recent annual results, chief executive Stephan Sturm announced that Fresenius wanted to publicly list both its Helios division – which owns and operates hospitals in Europe and developing countries – and Vamed, which provides services administrative and support services to hospitals and healthcare facilities around the world.
Sturm also said he was open to offers for the group’s stake in FMC, which specializes in the manufacture and operation of kidney dialysis machines. If either plan comes to fruition, they could start unlocking a conglomerate discount for Fresenius, especially since shares of the listed FMC have largely outperformed the rest of the DAX so far this year.
At the current share price, Fresenius’ 37% stake in FMC is worth around €5.8bn (£4.8bn) – or likely large enough to require a sale to a commercial buyer. This then raises the question of who might buy it. Five of Europe’s 10 largest medical companies are German, but it’s not hard to imagine that Siemens Healthineers (DE:SHL), or a large US company like Johnson & Johnson (US: JNJ) would be interested in grabbing FMC’s 40 percent share of the US kidney dialysis market. Siemens has a big presence in the US hospital market, for example.
FMC went through its own corporate overhaul after a few years of underperformance exacerbated by the impact of the pandemic.
Because the company relies on salespeople who physically visit hospitals to tout its products, Covid-19 regulations have limited their available contact time with hospital managers, especially in the key US market. -United. It’s also fair to say that the company was in a freewheeling state before the pandemic.
Removing Fresenius’ excess stake is key to improving share price performance for FMC, and arguably for Fresenius as well. However, for the group to sell out entirely, it would take a hefty price tag, given that FMC contributed €401m (£337m) of free cash to FRE’s fourth quarter total of just over $200. one billion euros.
Steady, albeit unspectacular, sales growth
|Sales growth by division||2021||2020||2019||2018||2017||Five-year average|
|Fresenius medical care||2%||5%||5%||4%||9%||5%|
|*Source: company annual report|
Hi a Kabi
As the table above illustrates, Fresenius comprises four divisions with widely varying growth rates, depending on the maturity of the underlying business. Streamlining this choppy performance is management’s top priority and one course of action could be to double down on Kabi, an intravenous drug division that sells biosimilars. These are generic versions of biopharmaceuticals – complex drugs whose patent protection has expired, such as older monoclonal antibody treatments.
Biosimilars have only started to gain traction in recent years, as companies specializing in the production of generic drugs – such as Ranbaxy and Dr Reddy’s – have had to equip themselves to produce biopharmaceuticals and obtain the regulatory approval of their products. As a result, the market for biosimilars is growing at 25% per year, meaning more companies are profiting from the switch to generics. The reason Kabi focuses on intravenous drugs is that these are for patients who are already hospitalized. An intravenous medication provides better dose control and helps patients stick to treatment plans than with oral medications taken at home.
Kabi – who last year had the highest ratio of investments to revenue of any Fresenius division – appears to be the beneficiary of any changes in the group’s capital allocation.
Investments will be needed as the division faces headwinds in the United States and China, including delayed drug launches as well as product recalls. As a result, the segment’s cash profit breakeven point has been postponed to 2024, although sales reached 7.19 billion euros in 2021. Kabi must now reformulate and market a steady stream of antibody drugs monoclonals with partners like Dr. Reddy’s to achieve scale and profitability.
Left out of rotation
Fresenius has always been a confusing business to unpack – somewhere between an investment fund and a direct market operator – which is why current plans to simplify the model are so welcome. Ultimately, the investment case comes down to valuation and the possibility that stocks could be revalued following large corporate actions. Removing the conglomerate haircut alone could add up to 15% to stock value, based on average conglomerate haircut values in the German market. Along with this technical factor, he chose to focus on an area where margin expansion is possible.
Overall, the balance sheet appears financially stable. A current ratio of 1.2 indicates positive cash generation, while annual net interest payments of €504 million on net debt of €23 billion – all with long-term maturities – appear manageable. Currently, Fresenius is valued at eight times broker Berenberg’s EPS forecast for 2023, suggesting the shares have been shut out of the value spin since the start of the year.
Any business actions she would take now would help improve that rating and invest in areas that have growth potential.
|Company Details||name||Market cap||Price||52 weeks Hi/Lo|
|Fresenius SE & Co. KGaA (ENG)||€18.0 billion||€32.14||€47.60 / €26.69|
|Size/debt||NAV per share*||Net Cash / Debt(-)*||Net debt / Ebitda||Ebit / Interest|
|Evaluation||PE before (+12 months)||DD (+12 months)||FCF yield (+12 months)||EV/Sales|
|Quality/ Growth||EBIT margin||ROCE||CAGR of sales over 5 years||CAGR EPS 5 years|
|Forecast / Momentum||Fwd EPS grth NTM||Fwd EPS grth STM||Mom of 3 months||% change in EPS before over 3 months|
|December 31 year-end||Sales (€bn)||Profit before tax (€bn)||EPS (c)||DPS (c)|
|Source: FactSet, adjusted PTP and EPS figures|
|NTM = next twelve months|
|STM = Second Twelve Months (i.e. in one year)|
|*Includes intangible assets of €32.8 billion or €59.29 per share|