Yet another purchase from an insider today: Dr Katharine Giles this time, adding 1000 shares at $21.72.

Provided I am counting correctly, that is now the 5th insider within a week to purchase shares on market.

@Bear77 @GazD @nerdag I think you are right in putting this one on the radar screen. Thank you. I've been doing some digging into $SHL and it is looking interesting.

I'll try and briefly tell the valuation story with a picture below. I've concluded that while the analysts are potentially being too optimistic on several key assumptions (German reimbursement reforms, Medicare Indexation, Acquisition Synergies/Operating Leverage) even if you back these out, I think we might be looking at a business that is significantly undervalued. (Preliminary assessment only!)

I think you have to stand back and look at the big picture from before the pandemic. I'll explain what I am trying to show below.

The areas to focus on are FY16-FY19 and FY25-FY28. We can completely ignore FY20 - FY24 because that was the PCR era when the business was earning super-profits from the pandemic.

The other thing to recognise is that pre-2020 and post-2020 are different for another reason. Pre-2020 was more organic, with network buildout at very stable EBITDA Margins - rcck steady at 17.3%. Post-2020 we saw M&A including entry into and expansion of new geographies of which LADR in Germany materially expands the European footprint.

EBITDA Margin - The Solid Lines

The bullish consensus is driven by views that EBITDA Margins will expand beyond anything seen in the pre-pandemic era. I wouldn't base my valuation on that, as there is both execution risk and regulatory risk. So, I am going to be concervative and assume EBITDA Margins revert closer to historical norms of 17.50%, giving some benefit of overhead reductions. That's the green solid line.

Now Valuation (EV/EBITDA) - The Dotted lines

Consensus Forecast is given by the dotted orange line. This requires both strong revenue growth and margin expansion.

Now I am going to assume neither. I am going to assume bad outcomes in German Pricing and Medicare Indexation, leading to low base-case and flat revenues of $10bn for FY26 to FY28.

Combining this with my more conservative EBITDA Margin (Green Line), I get the Purple Dotted Line for EV/EBITDA.

Now look at that in a historical context! The only thesis you need is that the existing (enlarged) portfolio is managed for operational excellence to drive a strong yield, and that "system and technology growth" compensates for regulatory claw-back. I don't think that's a demanding thesis.

So, I think this warrants the next level of work on valuation. But in my experience, when the effect looks that stark when you kick the tyres like this, then it is likely there is something there (other than perhaps I've messed up with the quick calcs ... which is entirely possible.)

My Takeways

$SHL has always been on my watchlist for years, but I've never held. For healthcare, I like stronger operating margins and strong organic growth, and the more recent combination of M&A Execution risk with Regulatory Pricing Risk means it has never made my short list or "Buys".

But at a time when a lot of my portfolio is either looking expensive or risky or both, this is potentially a significantly undervalued, quality business, that would add a nice defensive component to my portfolio.

A little more work is required, but I agree it looks interesting (FCF yield is looking like 6%+).

Disc: Not held

That's a decent $50K on-market purchase by a director @GazD, and the company made a new 8-year low intraday yesterday (of $21.07/share) before closing at $21.23, their lowest close in eight years, so a good day to be buying shares. It looks more than simply signalling to me. As a company director, she should have a fair idea if the company is being undervalued by the market, and she paid very close to the day low also. Sounds like smart buying.