RBCMuch more optimistic than TD. They lower their target to US$77 and maintain their upside scenario target of US$106.00. GLTA
October 22, 2015
Concordia Healthcare Corp.
Closes AMCo and provides clarity on debt
Our view:
We believe the continued weakness in Concordia shares is
unwarranted, particularly now that the AMCo deal has been completed.
As such, we would remain buyers given current 2016E and 2017E P/E
multiples of ~3.5x and ~3.1x, respectively. Concordia expects to derive less
than 10% of its revenues from U.S. government reimbursement in 2016,
with ~60% of its revenues generated in OUS markets.
Key points:
Continued sell-off remains unwarranted – we would be buyers at current
levels.
Following the concern around the healthcare sector and the panic
selling, CXRX has continued to fall victim to panic selling and short selling,
leaving it at a significant discount to its peer group. Peers currently trade
at 11x 2016E EPS and 9.5x 2017E EPS. While we believe CXRX shares
should trade at a discount, the ~65% haircut is unwarranted in our view
and we would be buyers at current levels. EV/EBITDA multiples also value
CXRX at a significant discount to its peers; both 2016E EV/EBITDA (~7.3x)
and 2017E EV/EBITDA (~7.0x) are undervalued relative to the peer group,
which has multiples of ~10.0x in 2016E and ~8.6x in 2017E. We are
confident that Concordia will remain within the terms of its existing debt
covenants and we believe the closing of the transaction should address a
part of recent concerns. Finally, we note that CXRX shares now trade at a
free cash flow yield of ~25%.
Management to provide additional guidance on Monday, October
26.
Management has provided clarity on U.S. exposure; following the
transaction, in 2016, CXRX expects 60% of revenues to come from OUS
and 10% to come from U.S. government reimbursement.
Debt in line with expectations; interest expense revised slightly higher.
The debt, broken down below, was relatively in line with expectations:
(i) $790MM in 9.5% senior notes due 2022; (ii) $1.1B LIBOR (1% floor)
+ 5.0% secured term loan due 2021; (iii) £500MM ($770MM) LIBOR (1%
floor) + 4.25% secured term loan due 2021; (iv) $135MM unsecured
bridge loan (9.5%, step-up to 11.5% after two years) due 2022; (v) $45MM
unsecured bridge loan (9.5%) due 2017; and (vi) $200MM currently un-
drawn secured revolving credit facility.
Updating outlook to reflect debt financing.
Following the announcement,
we released new estimates to reflect the AMCo purchase, and we have
now updated our outlook to reflect higher financing costs as spreads have
widened since the announcement. As such, we have adjusted 2015, 2016,
and 2017 estimates as detailed in the table to the right. We reduce our
price target to $77 from $86.