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ICON: Deleveraging Complete, Now See 18% CAGR In Valuation To FY'26E (Rating Upgrade)
ICLRICON plc(ICLR) Seeking Alpha·2024-07-13 06:25

Investment Thesis - ICON (ICLR) acquired PRA Health Sciences for ~12BninFeb2020,creatinganewentityfullyintegratedbyFY′21[5]−Thestockhasdoubledsincetheacquisition,withacurrentvaluationof 12Bn in Feb 2020, creating a new entity fully integrated by FY'21 [5] - The stock has doubled since the acquisition, with a current valuation of ~370–400/sharebasedon20xestimatedpost−taxearningsfromFY′24–′26E[5]−Thecompanyisde−riskedpost−acquisition,witha12−monthtotalshareholderreturn(TSR)projectedat 18.4400/share based on 20x estimated post-tax earnings from FY'24–'26E [5] - The company is de-risked post-acquisition, with a 12-month total shareholder return (TSR) projected at ~18.4% and a base case CAGR of ~18% to FY'26E, reaching 559/share [6] Financial Performance - Q1 FY'21 net bookings increased by +10% YoY, with a book-to-bill ratio of 1.25–1.27x [10] - Management projects a book-to-bill ratio of 1.2x–1.3x quarterly, with an average of 1.25x for FY'24, indicating robust revenue growth of ~7% [10] - Earnings leverage is strong, with ~18% earnings growth projected on 7% sales growth, representing 2.5x earnings leverage [10] - Free cash flow (FCF) exceeds 1Bnannually,with 1Bn annually, with ~1.8Bn in NOPAT projected for FY'25/'26E [10] Valuation and Capital Deployment - The company is valued at ~20x NOPAT, supported by increasing ROICs and a capital base producing higher and more stable earnings [10] - Management has deleveraged 2Bn in debt since FY'21, with a leverage ratio of 1.8x net debt to adjusted EBITDA as of Q1 FY'24 [10] - Capital deployment opportunities include M&A and potential share repurchases, with 275M paid on Term Loan B in Q1 FY'24 [10] Growth Catalysts - Strong order book through FY'25, with a trailing 12-month book-to-bill ratio of 1.24x [10] - Earnings leverage from a high-quality business model, with the market comfortable paying >20x EBIT [10] - Valuations are supported by >1BninFCFannually,increasingROICs,andacapitalbaseproducinghigherearnings[10]HistoricalPerformance−Post−taxearningsincreasedfrom1Bn in FCF annually, increasing ROICs, and a capital base producing higher earnings [10] Historical Performance - Post-tax earnings increased from 483.5M in Sep-21 to 1,505.8MinMar−24,withROICrisingfrom3.21,505.8M in Mar-24, with ROIC rising from 3.2% to 10.8% over the same period [15] - Free cash flow grew from 812M in Dec-21 to 1,582MinMar−24,drivenbyimprovedpost−taxmarginsandcapitalturnover[15]FutureProjections−ByFY′26E,thecompanyisprojectedtoreach 1,582M in Mar-24, driven by improved post-tax margins and capital turnover [15] Future Projections - By FY'26E, the company is projected to reach ~560/share, representing an 18% CAGR from current levels [17] - NOPAT is expected to grow from 1,505.8MinMar−24to1,505.8M in Mar-24 to 2,150.2M by FY'26E, with NOPAT per share increasing from 18.30to18.30 to 26.10 [19] - Economic earnings are projected to grow from 622.73MinFY′24Eto622.73M in FY'24E to 993.84M in FY'28E, with a cumulative sum of 4,011.92Movertheinvestmenthorizon[20]StrategicInsights−ThecompanyhastransformeditsearningsandcashflowoutlooksincethePRAHacquisition,withincreasingmarginsandcapitalturns[23]−Investorsarecomfortablepaying 20xNOPAT,valuingthecompanyat 4,011.92M over the investment horizon [20] Strategic Insights - The company has transformed its earnings and cash flow outlook since the PRAH acquisition, with increasing margins and capital turns [23] - Investors are comfortable paying ~20x NOPAT, valuing the company at ~370/share today, with potential upside to $400/share on a FCF basis [23]