High Yield : Is covid really a one off?

As the sector continues to perform well and report s 3-digits top-line s and earnings ’ quarterly growth s , we are publishing an update on the financials, valuation in the industry, outlooks and our mid-term view on how covid-19 testing will evolve. The s hare of coronavirus-related revenue reached 20-40% in the sector in FY2020. However, we expect it to increase further , up to 50%, in FY2021 on the back of (i) headwinds in the vaccination rollouts in Europe at the beginning of the year, and (ii) another surge in cases at the end of Q1/beginning of Q2 . Moreover, we anticipate that over the medium-term there will be a significant demand for PCR and antibody testing due to continuous need for testing to control mutation and proliferation of the virus . BCG, for example, valued covid-19 diagnostics market at €13bn in 2021 and €3bn by the end of 2025. Profitability is skyrocketing . The l ab operators have broadly fixed costs structure so that large volumes might substantially improve earnings. Q4 FY2020 saw up to 60% EBITDA margin generated on the covid-19 tests. Again, we expect companies to have this level of profitability at least during Q1 and Q2 FY2021 as number of tests did not decline during Q1 and even increased in some geographies (such as France). On tariffs, we believe that there will not be any major change in price of PCR tests as Germany and France has recently cut reimbursement rates. France did that in April 2020 by €8 to ~€66 (timing rules still apply) , while Germany decreased catalogue price in October last year. These two countries coupled with Switzerland are the most “generous” European countries. Italy, Spain, and Belgium have a rate of less than €50. Booming earnings led to a booming M&A market with Cerba being acquired by EQT, Synlab went public, and Adrian bought Inovie (a leading player in France). Unilabs and Amedes, two relatively big European players, have not announced a ny change of control yet. Although multiples were different for Cerba and Synlab, adjusting multiples for our mid-term view on PCR testing we find the industry valuation at 9 . 3 -12.0x. On the RV, it is getting more interesting as both Cerba and Biogroup refinanced their capital structures in 2021. Both are trading at the same level and we, as usual, prefer subs over seniors for an extra pick up in yield as we find business very defensive.