High Yield : They are killing it !

The y are definitely beneficiaries of covid-19 crisis! It was quite a year for L abs : from an organic decline in H1 to a +50% like-for-like growth in Q3 FY2020 coupled with ample FCF generation and deleveraging of more than 1.0x on average. This short note will give you a brief update of the recent trends in the European medical pathology industry that were thoroughly described in our study Medical Pathology. Defensive CCC+ . Q3 performance was boosted by a massive production ramp-up of PCR and antibody tests . Although initially we were cautious about potential profitability of PCR tests, EBITDA margins have skyrocketed for all three players thanks to high operating leverage (more than 2/3 of costs are fixed) business model. However, Germany and France have already taken steps to cut extreme profitability by substantially decreasing reimbursement rates. In this piece we did a few simulations for net leverage metric assuming an average tariff decline across Europe by 20%-35%. The result is “ deleveraging will continue ” even in the most pessimistic case if external expansion is not aggressive ( albeit it is not likely, in my opinion). On a RV basis we still prefer subs of Unilabs 2025 as we expect further convergence with Cerba in terms of z-spread and see a little upside once the imaging business fully recovers. Also, from a technical standpoint , we believe that the central banks will be pushing on a string and take the yield out of everything => defensive business with 3. 7 % until May 2022 (base case for the call date) is not that bad.