• FY 22A results snapshot: Revenue increased by 8% y/y, driven by the Services Business, while Retail printed low single digit growth. EBITDA was flat y/y, where the Services business margin came under pressure, while the Retail business saw robust margin expansion. This meant the EBITDA margin moderated by 99bps y/y to 12.9%. N.HEPS declined by 10% to ZAr 55.53/share. This was driven by higher depreciation and amortization charges, increased finance costs and one-off costs related to the COVID vaccine programme of ZAR 25mn (FY 21A: ZAR 5mn). If we adjust for the once off costs relate to the COVID vaccine programme, N.HEPS would have declined by 5%.
  • Denis Group was the standout performer in the Services business (68% of Group EBITDA): Service Business revenue increased by 13% y/y. This was largely driven by the full year inclusion of the Denis Group acquisition (revenue: +35% y/y) and the Healthcare SA business (revenue: +14% y/y), which benefited from steady growth from GEMS. EBITDA declined by 2% y/y, with the EBITDA margin contracting by 215bps y/y to 13.5%. The Denis Group EBITDA increased by 83% y/y, supporting strong margin expansion of 319bps to 12.1% (17.6% in H2 22A), well ahead of our expectations.
  • Profit contribution from the Retail segment continues to increase (32% of Group EBITDA, up 200bps y/y): Top line growth of 4% was disappointing, in our view. This was in part driven by increased nonadherence (FY 22A impact of at least ZAR 22mn) by chronic patients post COVID-19 decreasing chronic medicine sold and dispensed, coupled with the continued reduction in single-exit price on ARVs (-11% y/y). The Retail EBITDA increased by 10% y/y, mainly driven by Scriptpharm (EBITDA: +35% y/y) and Activo (EBITDA: +8% y/y).
  • Relationship with Sanlam is gaining traction: Organic growth to be driven from new healthcare solutions driven by this relationship, with Sanlam investing to activate distribution channels.
  • Increased focus on capital allocation to improve ROIC following Pharma expansion: ACT’s balance sheet remains strong, with net debt/EBITDA of 0.49x in FY 22A. ACT’s DPS has been stable since FY 19A and continues to offer an attractive dividend yield of over 9%. Net working capital requirements have increased significantly since FY 18A, driven by ACT’s pharma expansion. We expect net working capital requirements to increase further during FY 23-25A. Following substantial investment during FY 15-21A, CapEx appears to have normalised to c. ZAR 300-350mn. ACT noted that acquisition activities are largely now completed, with a focus on synergies.
  • ACT continues to trade on undemanding multiples and at a 33 discount to NAV: We calculate a target price range of ZAR 5.06-8.90/share. Including a one-year rolled dividend yield of 9%, this implies upside of 37-134%.

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