Saw a bullish view posted recently so thought I should provide a counterpoint.

Despite the current downtrend SHL is still looking quite overpriced to me.

Assuming COVID-related revenues taper off fairly sharply in FY22 I believe we are likely to see a return to revenue and EBIT numbers closer to FY20.

From FY20 to FY21 we saw sales jump from $14b to $18b, net revenue go from $6.8b to $8.8b, EBITDA from $1.45b to $2.56b, and net profit from $528m to $1.32b. Margins also expanded from 21.4% to 29.3%.

It's this last part that has me concerned - I would be expecting margins to shrink back to the low 20s as the COVID boost to revenues recedes. Taking this slightly pessimistic (although I think completely plausible) view of their FY22 performance, my back of the envelope numbers look something like:

Sales: $16b

Net revenue: $7.2b

EBITDA: $1.5b

Net Profit: $600m

Which gives us an EPS of $1.255 and a fair price of around $25 at a PE ratio of 20.

If one were a little less pessimistic one could start with $17b in sales and assume they can maintain a 25% margin for FY22. So basically this builds in some underlying growth (possible, although COVID would have made growing non-COVID revenues difficult), and a slower tapering of COVID revenues (again, possible). I think this is quite an optimistic view, but is worth doing to establish my upper bound on valuation. If we follow the numbers through it looks like this:

Sales: $17b

Net revenue: $7.75b

EBITDA: $1.95b

Net profit: $800m

This gives us an EPS of $1.67 and a fair price of $33 (at a PE of 20 again). Still looking very overpriced at the moment (closed at $40.59 on 24/9).

Disc: I hold currently a short position in SHL.