UCB reported excellent first half results, outperforming market expectations both at the top and bottom-line, driven by excellent product sales. Consequently, management narrowed the FY11 financial guidance towards the upper end of the previously-defined range. Although 2H11 will inevitably suffer from fierce generic erosion on mature products, we feel the targets are conservative and well achievable.
The first half update did not trigger any major updates to our FY11 sales or P&L forecasts. Most important changes are a small increase in REBITDA to € 698m (from € 691m), a decrease of € 50m in financial charges to € 136m, both contributing to an uplift of our FY11 core EPS estimate from € 1.75.sh to € 1.95/sh). We are ahead of the company’s guidance (revenue expected at € 3.1bn or more (from € 3.0bn to € 3.1bn previously), with REBITDA and core EPS at the upper end of the scales of respectively € 650-680m and € 1.6-€ 1.7) and expect that the consensus will see some soft increases as well.
While we are positive on UCB's mid to long-term prospects, we believe at current trading levels the market is pricing in the bright prospects of the company’s CVN products and drug development pipeline. Moreover, since the rally in May, spurred by take-over rumours, UCB’s share withstood the market turmoil, resulting in a year-to-date outperformance of 30% versus general indices and a substantial premium versus peers.
With no binary events expected in the coming period, we see limited downside risk from operations, but in thecurrent economic climate some investors may be tempted to take their profits. Overall, FY11 is still a transition year, with earnings expected to grow as of 2H12. We therefore advise investors to HOLD the stock with a target price of € 32/sh.