Valuation Analysis of Healthineers IPO

This assignment involves a thorough analysis of Healthineers' IPO, including valuations provided by major institutions such as Deutsche Bank, JP Morgan Chase, and BNP Paribas. A discounted cash flow (DCF) analysis and residual earnings model are used to determine the intrinsic value of the company, with results showing that the market price is higher than the calculated intrinsic value.

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A Report on
“Healthineers: A Strategic IPO”
F-506: Cases in Financial Decision Making
Submitted to:
Dr. Gazi Mohammad Hasan Jamil
Associate Professor
Department of Finance
University of Dhaka
Submitted By
Group-14
ID No. Name Remarks
21-910 Nazmun Nahar Nilima
21-912 Jannatul Ferdous

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21-949 Saif Mahmud
Date of Submission: 27 th February 2020

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Letter of Transmittal
27th February 2020
Dr. Gazi Mohammad Hasan Jamil
Associate Professor, Department of Finance, University of Dhaka.
Subject: Submission of report on “Healthineers: A Strategic IPO”.
Dear Sir,
We are pleased to present the report that you asked for as a part of our MBA, 2st
semester, and course F-506: Cases in Financial Decision Making. We are thankful to
you for giving us such an amazing opportunity to work on the topic “Healthineers: A
Strategic IPO”. We are privileged to work on such a topic where we could apply our
theoretical knowledge in understanding the real problem.
We have put our sincere effort to give this report a presentable shape and make it as
precise as possible. We cordially thank you for providing us with this unique
opportunity.
Sincerely yours,
Nazmun Nahar Nilima
ID: 21-910
On behalf of,
Group-04, MBA 21st Batch, Section
A Department of Finance
University of Dhaka

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Acknowledgment
At first, we would like to express our gratitude to the Almighty Allah for giving us such
strength and opportunity to complete the report within the scheduled time.
Suggestions and assistance from many individuals and experts supported us a lot in
every step of the report. It is our immense pleasure now to acknowledge them with
gratitude.
After the Almighty, we would like to express our sincere gratitude to our honorable
course teacher, Dr. Gazi Mohammad Hasan Jamil, Associate Professor of Finance
Department, University of Dhaka for his continuous support and guidance throughout
the course. His constant presence and words encouraged us a lot to complete the
assigned report. It would probably be impossible to complete this report without his
guidance and availability.
Finally, we are grateful to all of our group members. Without their earnest effort, we
couldn't complete the report.
This report is prepared for meeting our academic purpose, not for any other reason.
It might not be used for the benefit of any other purpose.

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Executive Summary
This report analyzes the case ‘Healthineers: A Strategic IPO’ which describes how
Healthineers, a subsidiary of Siemens AG, is about to go public. Healthineers is a part of
the healthcare industry which is dominated by players like General Electric, Philips,
Abbott and Roche. This industry offers great potential to a newly introduced company as
well as the possibility of being wiped away. The IPO is an important event for
Healthineers because it believes being separated from its parent company allow
entrepreneurial spirit to bloom and grant necessary autonomy. Its parent company, Siemens
AG, is currently proceeding according to its Vision 2020 strategy. But the vales established
by the said strategy does not seem to be working as healthcare industry proves to be
different than all other industries Siemens AG is currently operating in. So it is easy to see
why the management would be motivated to separate Healthineers from Siemens AG
(although Siemens AG would retain majority of the ownership). In addition, the stocks
could be used to purchase small start-ups which none of the valuations accounted for.
In light of this, Healthineers has appointed Deutsche Bank, Goldman Sachs and JP
Morgan Chase and Co. as the joint coordinators with support from financial institutions
such as BNP Paribas, Bank of America, Citi Group and UBS Investment Bank. They have
provided 3 valuations based on multiples and expected cash flows, all of which are
around €34 per share. As analysts and learners, it is our duty to question the analyses
provided.
In light of this, we have divided the report into 4 parts. The first part contains the company
overview, company analysis, industry analysis, extent of competition, Porter’s 5 Forces
model and many more. This has helped us prepare the investment thesis in the later part.
This part also talks about the Vision 2020 strategy and its impact. After reading this part,
an investor should have sufficient knowledge regarding the healthcare industry, its players
and most importantly, Healthineers.
The first part analyzes the relative valuation analysis. We have scrutinized the multiples in

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order to determine if the values are consistent with the reality. We have calculated the
enterprise value and the equity value of Healthineers using different multiples. Enterprise
value and equity value have been calculated by taking different multiples of different peer
groups. We have also calculated the same values by using sum-of-the-parts valuation
taking different comparable companies into the consideration. After taking all peers under
consideration, we believe that the reasonable estimated equity value per share is €29.34
on an average. And at the same time, reasonable estimated enterprise value of Healthineers
is €35784 on an average.
The third part of this report is about the discounted cash flow analysis. The DCF model
provided by Deutsche Bank suggests the value to be €34.18 per share. We assumed
optimistic and pessimistic positions by changing the variables and their values given by
Deutsche Bank. This helped us realize that this model is too much speculative. Because
just 1% change in the values produce a value per share that is around 50% lower than the
base case in the pessimistic scenario and around 100% higher than the base case in the
optimistic scenario. In addition, there were other problems such as difference in valuation
dates, not considering floatation costs etc. These led us to seek for alternatives. So, we
developed a residual earnings model that reduces the extent of speculation tremendously.
Based on this model, we suggest not to buy shares of Healthineers on 20th April, 2018
because we believe it is overvalued. We believe this because we could not find any
information that would brighten the future outlook of Healthineers. Only if Healthineers
can prove that it will be able to increase its profit margin or increase its market share in the
Diagnostics segment, the investors are suggested to buy shares of Healthineers.
The next part answers the questions presented in the Appendix 1 of the case. Some of
the question have already been answered in the earlier parts. We believe these questions
capture the theme of the case perfectly which is to scrutinize or question and sharpen our
analytic skills.
So what value do we suggest? None. Because of the limited information, it is impossible
to declare a value of Healthineers with certainty. In fact, it is not our duty to stick to one
value.

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This is why we have procured so many different scenarios with different values. It is the
responsibility of the investor to choose the scenario and make informed decision. This
case, in fact, is not about procuring a value, rather scrutinizing the given values.

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Contents
Letter of Transmittal......................................................................................................ii
Acknowledgment....................................................................................................iii
Executive Summary............................................................................................................iv
Chapter-01.......................................................................................................................... 1
1.1 Origin of the Report.......................................................................................................2
1.2 Objective of the Report..................................................................................................2
1.3 Scope of the Report.......................................................................................................2
1.4 Methodology..................................................................................................................2
1.5 Limitations of the Report..........................................................................................3
Chapter-2............................................................................................................................ 4
Chapter-3............................................................................................................................ 6
3.1 PESTEL Analysis:........................................................................................7
3.2 Porters 5 Forces Model................................................................................8
3.3 HHI Index....................................................................................................10
Chapter 4.......................................................................................................................... 11
4.1 Company Overview................................................................................................... 12
4.2 Vision 2020 of Healthineers......................................................................................12
4.3 Financial Analysis of Healthineers...........................................................................12
4.4 Internal Analysis of Healthineers.............................................................13
Chapter 5.......................................................................................................................... 16
5.1 Relative Valuation....................................................................................................17
5.1.1 Valuation in Comparison with Peer......................................................17
5.1.2 Sum-of-the-parts Valuation...................................................................20
5.2 Discounted Cash Flow.......................................................................................22
5.2.1 Base Case.....................................................................................................................24
5.2.2 Optimistic Case (Variation of 0.5%)......................................................................27
5.2.3 Optimistic Case (Variation of 1%).........................................................................28
5.3.5 Pessimistic Case (1% of Variation)......................................................................31
5.2.6 Interpretation.......................................................................................................32
5.2.7 Acquisition of Start-ups: The Missing Link.........................................................33

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5. 3 Residual Income.....................................................................................................34
5.3.1 Why Residual Income Model?..................................................................................34
5.3.2 Our Suggestion: Don’t Buy.......................................................................................37
5.3.3 When to Buy............................................................................................................ 38
Chapter-6..........................................................................................................................41
References........................................................................................................................43

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Chapter-01
Introduction

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1.1 Origin of the Report
According to the requirement of the course F-506: Cases in Financial Decision
Making, a report is to submit on the assigned case topic under the M.B.A. Program of
the Department of Finance. The topic of the report is “ Case analysis on
Healthineers: A strategic IPO” and we have been designated to do the report as per
the instructions of our respected course instructor Gazi Mohammad Hasan Jamil,
Associate Professor, Department of Finance, University of Dhaka.
1.2 Objective of the Report
Usually we gather theoretical knowledge from course material. But it is also very
much important to relate that theoretical knowledge with practical situation. The
basic objective of conducting this case analysis is applying our theoretical
knowledge in practical situation. The objective behind conducting this study is as
follows:
 To analyze the IPO strategy of Healthineers.
 To analyze the pre-IPO price and post IPO price to check it reliability.
 Analyze different alternatives that could add value to the company.
1.3 Scope of the Report
The study topic allows us to analyze the cases named “Healthineers: A Strategic
IPO”. We have gone through the case thoroughly, analyzed the problems of this
company and tried to find out solutions of these problems. Finally we have reached
recommendations that will help to take the decision. Some external information has
been used for lack of information provided.
1.4 Methodology
For preparing our report we went through the text and information collected from
case and applied our sense of finance which we gained from different course
especially from corporate finance and capital budgeting to evaluate and justify our
assigned topic. All the data used in this report have been gathered from the case.
Financial techniques taught in our BBA and MBA courses have been used here.
Some reasonable

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assumptions have been made because of lack of information provided. To analyze
and solving the problem Free cash flow method, Crystal ball software is to
complete the simulation analysis.
1.5 Limitations of the Report
The limitations of the study are defined by the extensive of the facts covered by the
study and those that left out. Learning all functions, moods of business, risk factors
and protective covenants were quite tough within specified time framework. There
was also time constraint. While attempting to solve the problem we have to assume
some factors. The analysis could have been better if those data were provided.

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Chapter-2
Investment Thesis for Healthineers: A Strategic IPO

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In a market packed with players, Healthineers appear to be a company with the
potential to lead the health care industry. Its parent company Siemens AG has been
successful to maintain a portfolio that consists of businesses with leading market
positions. In light of this, the management of Siemens has decided to treat Healthineers
as a separate company for increased entrepreneurial spontaneity and autonomy. The
separation will also allow Healthineers to detach from the Vision 2020 strategy to
some extent which focuses on electrification, digitization and automation.
Apparently, the healthcare industry does not conform to what the Vision 2020
articulates. Right now, this industry is going through the process of industrialization
and consolidation; and turning to knowledge based from experience based. This
period of turmoil is expected to be settled soon and produce market leaders in each
segment. Healthineers aims to be at the higher end of value spectrum after that
period. Its performance has been consistent with the implementation of this
objective.
 No single customer or product accounts for more than 10% of sales.
Therefore, the concentration risk is low.
 The company has partnerships with more than 90 of the world’s top 100
health care providers. It has a technology portfolio that influenced more than
70% of critical clinical decisions.
 The Vision 2020 aims to put the company at the top of the industry.
Implementation of the Vision 2020 is happening faster than expected.
 Most of the sales are recurring (57% in 2017).
The segments in the healthcare industry (Imaging, Diagnostics and Advanced Therapies)
are expected to grow at 3-5% on average each year. With leading positions in
Imaging and Advanced Therapies, Healthineers desires to achieve the leading
position in the Diagnostics segment too. With its newly introduced Atellica platform,
Healthineers is trying to reorganize its product offering and reduce the number of
products.
Investment in Healthineers is likely to generate reasonable returns for the holder of
investments. Under the indirect supervision of Siemens CEO Joe Kaeser who has
been leading Siemens successfully since 2013 and the direct supervision of Bernd
Montag, Healthineers will continue to drive the healthcare industry and tap into

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adjacent markets; and generate significant return for its investors.

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Chapter-3
Economy and Industry Analysis

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The Healthineers Company is belonging in the Healthcare industry. The industry has
analyzed based on the PESTEL analysis and Porter’s 5 forces model.
3.1 PESTEL Analysis:
A PESTEL analysis is a framework or tool used by marketers to analyses and
monitors the macro-environmental (external marketing environment) factors that
have an impact on an organization. The outcome of PESTEL analysis in case of
Healthineers is given below:
Political Factor: The healthcare industry is impacted by many factors including,
insurance mandates, tax legislation changes, and consumer protection. Government
spending for healthcare can be affected by tax policy changes. It can be a benefit,
allowing for increased subsidies. Or it can be a cause for concern. Governmental
changes can affect the public and the healthcare services they’re entitled to,
especially with changing healthcare bills and plans. The political uncertainty across
the Europe and the terrorist attack creates negative impact on Healthineers as it runs
its business activities across the world.
Economic Factor: Healthcare organizations will be affected by many economic factors,
especially inflation, unemployment, and interest rates. Any of these changes can
change how the public is able to spend their money, impacting policy spending.
Healthineers m a nuf a ctur e medica l d ev ices w on ’ t h av e m a ny people a ble to p ay
t heir ra te if t h e un employm e nt ra te is in cre a sed. Like w ise, if less people a re ab le t o
work, the y w on ’t qualify for work benefits, including healthcare. The authority of
Healthineers has taken “Growth in Smart City Project” under which they want to
make the whole industry in an automated one. The GDP growth rate of Germany
increase by 1.5% where the Healthineers also has some contribution.
Social Factor: Healthcare relies on understanding the changes in demographics
and public values. Certain communities can share fears, beliefs, and cultural norms.
If a hea lthca re pr of ession a l or hospi ta l isn ’ t aware of these con di t ion s whi le they trea t
th at public, it can cause problems. Additionally, medical professionals need to stay

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on their

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toes about new trends. The people of 21st century are more aware of their health
standard so the Healthineers authority tries to ensure it. For the social development,
they offer student leadership program.
Technological Factor: The healthcare industry is seeing positive changes in
treatments because of technological advancements. Developments with medical
devices allow patients to receive better care. For example, hearing aid devices have
the tools to enhance performance, providing crystal clear sound, less background
noise, and premium options for a better hearing experience. The Healthineers
authority wants to implement the changes in app developments, allowing patients to
get care faster than ever before. They like to modify and improve their technological
devices.
Environmental Factor: Nowadays the business world is more concern about the
environmental issue. They try to keep the environment clean so they are aware of
running their business activities. The authority of Healthineers sets a target to reduce
their carbon dioxide by 2020. They are following the Environmental Act-2012 so that
their business activities will be environment friendly.
Legal Factor: In every country there are some legal business rules and regulation
which should be followed by the business firm. In Germany there is also some
business rules and the authority of Healthineers has to follow those rules, such as-
Intellectual Property Laws-2003, Data Protection Laws, and Company Act-1870.
3.2 Porters 5 Forces Model
Porter's Five Forces is a model that identifies and analyzes five competitive forces
that shape every industry and helps determine an industry's weaknesses and
strengths. The Five Forces analysis is frequently used to identify an industry's
structure to determine corporate strategy. The outcome of Porter’s 5 Forces model of
Healthineers is given below:

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Threat of Substitution: The threat of substitution of Healthineers is moderate.
The Healthineers has a large number of product lines and they have done patent
most of their products. So it is difficult for any other company to copy their product.
Threat of New Entrants: The threat of new entrants is low. In the healthcare
industry, it need s hi g h c apital to start a b usin ess . So it c an ’ t be possib le for a fi rm to e nter
ea si ly in thi s industry. The capital requirement is a barrier in this industry.
Bargaining power of the Suppliers: The bargaining power of supplier is high because
there are a limited number of suppliers in the healthcare industry who provides raw
materials. For this reason the manufactures like- Healthineers are bound to pay the
charges that the suppliers has assigned.
Bargaining power of the Buyers: The bargaining power of Buyers is medium
because they prefer to buy quality products. For this reason they are ready to pay
more to the seller without making any bargaining.
Market Rivalry: The rival of this industry is high. Though it is difficult to enter into
this industry but the rivalry is high. The existing companies are in good position so
they try to dump each other. For this reason the intensity of rivalry among them is
very high.

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3.3 HHI Index
The Herfindahl-Hirschman Index (HHI) is a commonly accepted measure of market
concentration. It is calculated by squaring the market share of each firm competing in
a market and then summing the resulting numbers. Here we have used 7
competitors of Healthineers. The sales information we have collected from the
financial statements of those individual companies.
HHI Index
Sales (in
millions)
Market Share MS^2
GE 25784.45 18.77% 352.49
Philips 22719.03 16.54% 273.66
Roche 12056.45 8.78% 77.07
Abbott 17600.10 12.82% 164.23
Canon Inc 14060.76 10.24% 104.82
Sysmex 16190.23 11.79% 138.97
Shimadzu 12500.50 9.10% 82.85
Healthineers 16425.44 11.96% 143.04
Total 137,337 1 1337.12
After calculating the HHI index the result is 1337.12 which is less than 1500. This
result indicates that the Healthcare industry is competitive. Though there is less
company in this industry but the competition is very high.

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Chapter 4
Company Analysis

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4.1 Company Overview
Siemens Healthineers AG is a medical technology company. It is the mother company
for several medical technology companies and is headquartered in Erlangen,
Germany. The company dates its early beginnings in 1847 to a small family business
in Berlin, co- founded by Werner von Siemens and Johann Georg Halske. Siemens
Healthineers is connected to the larger corporation, Siemens AG. In May 2016, the
business operations of Siemens Healthcare GmbH were rebranded "Siemens
Healthineers." Globally the companies owned by Siemens Healthineers AG have
45,000 employees, most of them in Germany. The sales of Healthineers are distributed
among 3 areas, such as- Medical imaging Equipment, laboratory and point of care
diagnostics, advanced therapies. The products are- X-rays, Magnetic resonance, and
computed tomography. Medical instrument, chronic disease analysis, molecular
imaging, ultra sound etc. it became publicly-listed on the Frankfurt Stock Exchange in
March 2018.
4.2 Vision 2020 of Healthineers
The Vision of Healthineers are- every employee of Healthineers should have to take
personal responsibility for company’s achievements, occupying attractive growth field,
will surpass the competitor’s efficiency and performance, providing automation
across the industry, creating digital connection to run assets effectively, will become
a separate identity.
The impact of this vision is that- the overall performance of Healthineers will
increase, their business growth will improve rapidly, will improve the working
efficiency, the industry will turn up into an automated industry, through IPO it can be
an independent firm and creates positive impact on business.
4.3 Financial Analysis of Healthineers
DuPont Analysis
The DuPont analysis is a useful technique that is used to decompose the different
drivers of return on equity (ROE). The decomposition of ROE allows investors to focus
on the key metrics of financial performance individually to identify strengths and

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weaknesses. There

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are three major financial metrics that drive return on equity (ROE): operating
efficiency, asset use efficiency and financial leverage. Operating efficiency is represented
by net profit margin or net income divided by total sales or revenue. Asset use
efficiency is measured by the asset turnover ratio. Leverage is measured by the equity
multiplier, which is equal to average assets divided by average equity.
DUPONT ANALYSIS
2018 2017
Net Profit Margin 7.87% 7.47%
Asset Turnover 73.49% 72.39%
Equity Multiplier 0.84 0.71
ROE 4.54% 4.10%
After calculation, it has seen that in 2018 the Asset Turnover creates more impact on
the Return on Equity and the impact of equity multiplier is low here. In comparison to
2017, the ROE has increased.
4.4 Internal Analysis of Healthineers
For conducting the company analysis SWOT analysis has been used and the
outcome is described below:
Strength: This company is consistently at the forefront of imaging technology.
Cutting edge imaging in computed tomography is the latest addition to the list. This
new scanner has dual x-ray tubes, both generating images simultaneously. These
images can be combined to determine the make-up of pathology found on the scan.
In concert with the new low radiation dose platform, this scanner is the way of the
future. Siemens holds a 40% market share in the CT sales business and continues
to innovate. In addition to new technologies coming on to the market, Siemens
produces a number of other imaging solutions and consistently ranks in the top 3 for
sales of medical imaging equipment. After the recent split from parent company,

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Siemens AG, plans to take the new

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Healthineers Company public are in the works. This should result in an influx of cash
for the technology driven foundling at a time when Siemens AG profit margins are
down. Siemens Healthineers is branching out into Population Health Management
and molecular diagnosis; this IPO should give the company the resources it needs to
continue delving into new areas. It creates partnership with 100 top healthcare
providers. Among their several products, it holds the leading position in most of the
products line.
Weakness: Siemens has had several product recalls in the past few years. The past
four recalls have been for analyzers used in the laboratory. Incorrect results were
being calculated, a scary thing when you are talking about patient care. Treatment
options for patients are based on diagnostic studies; with incorrect data the patient is
not getting optimal care choices. Increased time to market and more thorough testing
before new product is released seems to be in order. These recalls can lead to
distrust among the consumer, making them reluctant to purchase new products from
Siemens.
Opportunities: With the acquisition of two software companies in as many years,
Siemens is investing heavily in the IT portion of the business. Both purchases
increase the knowledge base in engineering and electronic software, an important
piece of continued research and development. Look for Siemens to continue to
purchase smaller, struggling healthcare focused businesses as competition for
purchasing dollars becomes more difficult. There have been a couple of recent
partnerships for Siemens Healthineers, resulting in some new offerings for the
company. In one instance, IBM has partnered with them in the realm of Population
Health Management (PHM). PHM is crucial to the new medical model of value-based
care in place of the old fee-for-service model. Coordinating a patient’s care in all
aspects through all disease types‟ results in better patient outcomes and reduced
costs throughout treatment. In yet another, a partnership with HeartFlow holds the
promise of exciting new advancements in cardiac CT and diagnosis. One of the new
technologies that Siemens has been working on is PET-MR. PET or Positron

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Emission Tomography has been working together with Computed Tomography for
many years now. This type of study is used heavily in cancer patients,

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determining the extent of disease initially as well as during treatment.
Threats: As value based care, which is focused on getting and keeping people well
takes over for the old fee-for-service model, hospital budgets are stretched. Value
based care differs from fee-for-service in several ways. For inpatient hospital care,
the hospital is reimbursed a set amount per day of care, regardless of the amount of
diagnostic tests performed. Outpatient models are focused on preventive medicine,
get people healthy so they do not need expensive treatments and medications. For
the past several years, Medicare reimbursement reductions have also negatively
impacted hospital finances. These social and political changes can certainly affect
the amount of capital that hospitals have to spend on equipment and technology.
One example of regulatory requirements affecting Siemens Healthineers is the
increase in rules and regulations surrounding radiation dose. The Joint Commission
in 2017 added radiation dose reporting requirements for Computed Tomography. It is
expected that in the next 1-2 years fluoroscopy will follow suit. Equipment must be
compatible and up to these new standards as it comes to market. The focus on
upgradeable and integrated systems should be at the forefront of any imaging
technology manufacturer. New regulations occasionally take everyone by surprise
when they are enacted quickly, Siemens should be vigilant about exploring future
possible rule changes.

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Chapter 5
Valuation of Healthineers

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5.1 Relative Valuation
Relati ve val ua ti on mod e l is u sed t o deter m in e a f ir m ’ s f in an c ial worth by c omp ari n g th e
f ir m ’s value to that of its competitors. Relative valuation uses multiples, averages, ratios,
and benchmarks to determine a firm's value. A benchmark may be selected by finding
an industry-wide average, and that average is then used to determine relative value. An
absolute measure, on the other hand, makes no external reference to a benchmark or
average. Because of the importance of developing an accurate benchmark or industry
average, it is important to only compare companies in the same industry and market
capitalization when calculating relative values.
Relative valuation is used assuming that the industry with which a firm is competing
cannot be wron g . Ba sed o n thi s a ssumptio n, it is c on s ide red tha t the de term in ed f irm ’ s
value w ill almost closer to the actual value of the firm.
In this part, we have calculated the enterprise value and the equity value of
Healthineers under different comparable. Firstly, enterprise value and equity value have
been calculated by taking different multiples of different peer groups. On the other
hand, enterprise value and equity value have also been calculated by sum-of-the-parts
valuation taking different comparable companies into the consideration.
We have taken two multiples for the calculation namely, EV/EBITDA multiple and
EV/Sales multiple. We could not use the P/E multiple because appropriate discount rate
for net earnings has not been addressed in the case. Moreover, there is lacking of P/E
multiple data in sum-of-the-parts valuation. So make it simple and comparable, we
exclude this multiple from our analysis which is a limitation of the case analysis.
5.1.1 Valuation in Comparison with Peer
In this case of Healthineers, enterprise value of a company shows the total value of the
equity, debt of the company, minority interest and unfunded pension fund of the company.
Enterprise value of Heathineers company is showing different value calculation when the
chosen multiples have been differently taken. On the other hand, equity value of
Healthineers has been shown per share by deducting all the debt portion and unfunded

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pension amount from the

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enterprise value.
Enterprise Value: Enterprise value of Healthineers under different peer comparisons has
been shown below-
In the above table, we have taken four peers to show the differences in enterprise
value calculations. Among them, largest direct competitors are showing the direct four
competitors of Healthineers namely, Abbot Laboratories, General Electric, Phillips and
Roche. EU MedTech peer comparison shows the enterprise value in comparison with
all the medical technological heathcare companies in European Union. US MedTech is
showing comparison with United States medical technological companies in healthcare
industry. On the other hand, all peers are considering all the companies in the
healthcare sector irrespective of its size, region and authority. The graph is showing a
higher enterprise value when we are taking enterprise value/sales multiple and it is the
highest when comparing with US MedTech peers. When comparing with largest direct
competitors, enterprise value shows a lower value in each of the three multiples.
Equity Value: Equity value per share of Healthineers has been calculated on the
basis of Deutsche Bank‟s forecast of 2019. To make it comparable with the current
market price on 20 April 2018, we h ave di s coun ted the valu e per sha re by the f irm ’ s
di s coun t rate of 8%. The time factor has been calculated in terms of days. So

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discount factor here is

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calculated below:
Here, 621 is showing rest of the days calculation from 20 April 2018 to 31 December 2019.
Under different peer comparisons, calculated equity value per share is shown below-
Here, market share price was €32.70 on April 20, 2018. Below this market price,
the market share value is said to be overvalued and above this price, the share is
said to be undervalued. Under largest direct peers and all peers consideration,
the share of Healthineers is undervalued except in enterprise value/sales
multiple.
Among the four peer groups, we think all peers group is appropriate to compare the
multiple with Healthineers. Because, the largest direct competitor group shows the
direct competitors of Healthineers when it was operating business as a private firm.
But after going for IPO, it would have to compete with all the companies within the
industry irrespective of location, size and ownership. So taking all peers under
consideration, reasonable estimated equity value per share is €29.34 on an
average. And at the same time, reasonable estimated enterprise value of
Healthineers is €35784 on an average.

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5.1.2 Sum-of-the-parts Valuation
Sum of the parts valuation actually shows the demarcation of each segment’s
contribution to its enterprise value and thus to the equity value of the company. That
is, to know which sector is contributing to generate the enterprise value much, sum-
of-the-parts analysis is necessary. In this case of Healthineers IPO, JP Morgan
Chase and Company provided such a sum-of-the-parts analysis.
Segments Premium/(Discount)
Median
EV/EBITDA EV/Sales
Imaging 0.2 11 2.9
Diagnostics -0.33 14.8 3.6
Advanced Therapies 0.2 11.3 3.2
In this case, JP Morgan has provided with the median value with notation that they
think imaging and advanced therapies will trade at premium of 20% because of their
higher market share and profit margin. On the other hand, diagnostic will be traded
at discount due to market share losses and risks associated with the roll-out of the
Atellica System.
Enterprise value under sum-of-the-parts valuation approach has been calculated by
combining forecasts of both the analysts. In case Deutsche Bank, the base is calculated
by taking the original forecast, where the optimistic and the pessimistic scenarios
have been calculated by adjusting +10% or, -10%. The enterprise value has been
shown below:

23
The above graph shows the enterprise value under sum-of-the-parts valuation. We
have introduced two more scenarios here to incorporate if the investors are
optimistic and if they are pessimistic about the value of the Healthineers. The
following graph is showing the equity value per share under each of the three
scenarios after deducting debt, pension fund from the enterprise value.
As usual, in pessimistic scenario, the share price is lower than that of market price
on 20 April, 2018. But under enterprise value/sales multiple, in optimistic scenario
equity value per share is higher than the market price. It shows that the overall

24
share price of

25
Healthineers is overvalued and so it is expected that the price will fall in the future.
Sum-of-the-parts valuation also reveals how much contribution is coming from which
segments. Our analysis says that more than 50% enterprise value is generated from
imaging, 30% comes from diagnostics though it holds a larger addressable market and
less than 20% comes from advanced therapies.
Considering all the factors under relative valuation, it would not be a good buy at
€32.70 on 20 April 2018. But further analysis should be conducted to address the
potentiality of the segments properly before taking any final decision.
5.2 Discounted Cash Flow
According to the discounted cash flow analysis provided Deutsche Bank, the value of
the Healthineers was €34,440 million on 31st December, 2018. And this value does
not include the floatation costs. So to know what the value of the Healthineers is on
20th April 2018, we simply took the equity value backwards by discounting it with the
weighted average cost of capital and subtracted the floatation cost. We know that the
floatation cost ranges from 2% to 8% of total equity issue. We took a conservative
stance and decided to go with 8% floatation cost. It should be mentioned that March
16th 2018 was the first trading day for Healthineers. So it was necessary to calculate
the equity value on that day to incorporate floatation cost. Then the equity value was
moved forward to 20th April 2018 at 8% WACC. Our calculations suggest that value
per share on 20th April, 2018 is €30.03. Here are the calculations. More can be found
out on the Excel file we have provided on sheet ‘Considering Floatation Cost’.

26
Particulars Amount (in million
euros)
Enterprise value 36777
Net debt (1362)
Minority interest 0
Unfunded pension liability (975)
Value of equity on 31st December, 2018 34440
Value of equity on 16th March, 2018 (before
floatation)
32397
Floatation cost (2592)
Value of equity on 16th March, 2018 29806
Value of equity on 20th April, 2018 30033
Number of shares 1000
Value per share 30.03
To determi ne the va lue drive rs, w e have used C rysta l Ba ll ’s sen si ti vity an alys is f u nc ti on .
It nicely presents the variables that have any kind of impact on the dependent
variable ‘value per share’ and their extent of impact. This is what we have found.
Sensitivity Analysis (only the major ones)
Discount rate -39.9%
Working capital as a percentage of revenue in 2032 -22.2%
Working capital as a percentage of revenue in 2031 18.2

27
EBIT margin in 2032 15.3
Tax rate in 2032 -0.8%
Depreciation and amortization as a % of revenue in 2032 0.7%
Capex as a % of revenue -0.6%
As c an be seen from the tab le a bov e, the „ di s co un t rat e‟ ha s the most eff ec t on value per
share of Healthineers. The next variable that value per share is most sensitive to is
working capital expressed as a percentage of revenue in 2032. There are 2 more
major variables: EBIT margin in 2032 and Working capital as a percentage of
revenue in 2031. It
should be mentioned that a detailed bar chart representing their effect has been
presented in the „Discoun ted C ash F low Ana lys is ‟ sec ti o n of thi s report.
5.2.1 Base Case
The case incorporates a free cash flow valuation model that suggests a fair value of
€34.44 for each share. Prepared by the Deutsche Bank, this model assumes:
 discount rate terminal growth rate revenue growth rate EBIT margin
 tax rate
 depreciation and amortization as a percentage of revenue working capital as a
percentage of revenue
 and capex as a percentage of revenue
Most of the enterprise value (49%) comes from the present value of terminal value.
Value as of end of 2018 %
PV of FCF through 2022 5,842 16%
PV of FCF 2-23-2032, transition 12,949 35%
PV of terminal value 17,986 49%
Enterprise value 36,777 100%
After running the Crystal Ball, we have been able to find these results.

28
Graph: Probability distribution of value per share (base case)
This probability distribution is a slightly right skewed normal distribution. Because the
skewness is pretty small, the difference between median and mean is only 0.34
(compared to the range of 19.62). Both the mean and median are very close to the
base case which leads us to believe that this valuation model prepared by Deutcshe
Bank analysists is sound.
At the 95% confidence level, the value per share resides between 25.76 and
45.38. The sensitivity analysis embedded in the Crystal Ball generates this
output.
Sensitivity Analysis (only the major ones)
Discount rate -39.9%
Working capital as a percentage of revenue in 2032 -22.2%
Working capital as a percentage of revenue in 2031 18.2
EBIT margin in 2032 15.3
Tax rate in 2032 -0.8%
Depreciation and amortization as a % of revenue in 2032 0.7%

29
Capex as a % of revenue -0.6%

30
Graph: Bar chart presenting sensitivity analysis of the base
case The statistic of the calculation and their forecast values are:
Forecast: Value per share
Statistic Forecast values
Trials 100,000
Base Case 34.44
Mean 34.69
Median 34.35
Standard Deviation 5.05
Variance 25.54
Skewness 0.3554
Kurtosis 3.06
Coeff. of Variation 0.1457
Minimum 16.9
Maximum 58.74
Mean Std. Error 0.02

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5.2.2 Optimistic Case (Variation of 0.5%)
Exactly what makes the base case an optimistic one is very much uncertain. A
variation of 0.5% means every variable that adds value will be increased by 0.5%
and every variable that reduces value will be reduced by 0.5%. Now the necessary
actions that will increase- decrease those variables in a favorable manner are
unknown and they certainly will not be seen in the next few years. But it has been
done anyway in order to determine the potential of Healthineers. If we were to
associate a scenarios with this case, it’d be where Healthineers is slowly but surely
becoming the market leader.
The calculations show that the fair value per share in this case is €47.06 which is
34.64% higher than the base case.
The probability distribution generated by the Crystal Ball is:
Graph: Probability distribution of value per share (0.5% optimistic)
At the 95% confidence level, the value per share resides between 35.08 and 62.74.

32
The sensitivity analysis produces this output:
Graph: Bar chart presenting sensitivity analysis of 0.5% optimistic case
5.2.3 Optimistic Case (Variation of 1%)
We believe this situation is highly unlikely. Why? Because this suggests the value
per share to be €66.18 which is close to 100% higher than the base case suggests.
This deviation tells us that it is highly unlikely that the Healthineers will be able to
achieve a paradigm shift and be the market leader in the 1st year after its IPO. A
variation of 1 % means every variable that adds value will be increased by 1 % and
every variable that reduces value will be reduced by 1%. In no way, that is feasible
for a company like Healthineers in the healthcare industry. But we did it anyway to
determine how sensitive the variables are in the valuation process. The probability
distribution given by Crystal ball in this case is:

33
Graph: Probability distribution of value per share (1%
optimistic) Output generated by sensitivity analysis shows us this.
Graph: Bar chart presenting sensitivity analysis of 1% optimistic case
5.2.4 Pessimistic Case (Variation of 0.5%)
In addition to considering optimistic scenarios, we have also considered pessimistic
scenarios. In the first case, we have considered a variation of 0.5% in each variable.
It means every variable that adds value has been reduced by 0.5% and every

34
variable that

35
reduces value has been increased by 0.5%. The outcome is €25.53 which is 34.9%
lower than the value suggested in the base case. The probability distribution
provided by Crystal Ball is:
Graph: Probability distribution of value per share (0.5%
pessimistic) The sensitivity analysis generates this outcome:
Graph: Bar chart presenting sensitivity analysis of 0.5% pessimistic case

36
5.2.5 Pessimistic Case (1% of Variation)
Just like the 1% optimistic case, this scenario is highly unlikely. If we were to
associate a scenario with this case, it’d be the one where Healthineers perform its
worst in each variable. The value suggested in this case is 18.91 which is 82% lower
than the base case. The probability distribution provided by the Crystal Ball is:
Graph: Probability distribution of value per share (1%
pessimistic) The sensitivity analysis embedded in the Crystal Ball
generates this output:

37
Graph: Bar chart presenting sensitivity analysis of 1% pessimistic case

38
5.2.6 Interpretation
What do all these mean? Do the values help us take a decision? Unfortunately, most
of the above analyses do not help us form a sound decision. Why? First of all, the
base case is provided by the Deutsche Bank which is the selected investment bank
for handling the IPO process of Healthineers. As analysts, it is our duty to question
every aspect of the valuation given by DB, not trust it at the first glance. Second, the
optimistic and pessimistic scenarios we have considered are very basic in nature. We
have assumed equal change in every variable which is highly unlikely. So the FCF
valuation analysis did not help us determine whether Healthineers is a good choice
for investment.
But the analyses helped us understand several things. First of all, we now know how
sensitive the variables are. Just 1% variation leads to a value that is either almost
half or double that of the base value. For example, if the discount rate could be
reduced or EBIT margin in 2032 increased, it’d increase the value per share
tremendously. Second, wesense that the value per share of €34.44 is bit of a forced
value, meaning DB tried to make this value. Because some changes in variables
(especially later in the forecast period) lead to significant changes in value per share.
This would be considered normal if the other two valuations did not suggest almost
the same value.
So the summary is:

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5.2.7 Acquisition of Start-ups: The Missing Link
The DCF analysis provided by Deutsche Bank did not incorporate the acquisition of
any start-ups. Why is this particular thing important or relevant to the case? Because it
was specifically mentioned in the case that the issued equity could be used to acquire
start-ups and we believe it could really change the future outlook of Healthineers. One
particular characteristic of the healthcare industry is that large companies of this
industry lack entrepreneurial spirit. These companies are usually so large that a new
idea barely sees the light of the day. To make up for it, these large companies
frequently acquire start-ups which are involved in research in specific areas. Being
acquired is an attractive option for these start-ups too as they lack the necessary
capital to continue their endeavors. So in short, the large companies acquire start-ups
and invest in them so that they can come with new products that would enrich a
company’s product and service portfolio.
This is what we have considered in our DCF valuation of Healthineers: acquisition of
start-ups. This can be considered as an „alternative‟ as this idea has not been
incorporated in the base case. We have assumed several things. They are:
1. Healthineers will acquire a start-up every two years for €30 million on average.
2. The effect of acquisition of a start-up will be seen in the revenue growth 2 years
after purchase. We are assuming the revenue growth will increase by 0.25% for each
acquisition.
These assumptions are very conservative. Rarely a start-up is priced at or more than
€300 million. In addition, a new successful product should increase the revenue
stream by more than 0.5% in a year. But we considered them anyway since it is
better to be modest in the world of valuation.
We have also selected possible attractive start-ups for Healthineers to acquire. Since
Healthineers is lacking in the Diagnostics sector, we have focused on start-ups that
specialize in this segment of the market. In addition, we have preferred start-ups that
use

40
artificial intelligence because we believe artificial intelligence is the next step in the
healthcare industry.
These companies are:
1. higi (https://higi.com)
2. Spring Health (https://www.springhealth.com)
3. Neo Light (https://www.theneolight.com)
4. Basil Leaf Technologies (http://www.basilleaftech.com)
5. Univfy (https://www.univfy.com)
6. Babylon (https://www.babylonhealth.com)
7. Healx (https://healx.io)
8. Nicotrax (https://www.nicotrax.com)
It should be mentioned that the Healthineers will continue to have regular capital
expenditure in addition to acquisitions. The variables have been kept the same
except the terminal growth rate which has been increased to 3%.
After incorporating the notion of acquisition, we have found the value per share to be
€42.5 which is 23.4% higher than the base case.
5. 3 Residual Income
This section aims to answer the question whether one share of Healthineers is a
good buy on April 20, 2018 at €32.7. We have used the residual income model to
determine the intrinsic value of Healthineers. This question may arise, “why residual
income model has been used?” The next subsection answers it in details.
5.3.1 Why Residual Income Model?
First of all, the case provides enough information to determine the residual incomes
from 2018 to 2021. We know the total addressable market for each segment of the
industry, at what rate they are going to grow, what the market shares of Healthineers
are (based on sales in 2017) and how much Healthineers is going to retain (since it
is a growth firm, it is

41
going to retain all of its net income). We have assumed a profit margin of 18.3% on
which we are unable to comment on due to lack of information (Is it good? Bad? How
are the competitors doing?). The starting common stock of equity is worth €29,100
million because we know for a fact that Healthineers went public on March 16th 2018
at €29.1 per share with 1 billion shares.
Second of all, the residual earnings model has allowed us to reduce the amount of
speculation. The DCF model used by Deutsche Bank entailed a ton of variables. A
good valuation model incorporates speculation as less as possible. Our model uses
only a few variables.
Discounted Cash Flow Analysis
Assumed Variables Specified Variables
Terminal growth rate Revenue (only in 2018)
Revenue growth rate (2019-2032) EBIT (only in 2018)
Tax rate (2019-2032) Taxes (only in 2018)
Depreciation and amortization as %
of revenue (2019-2032)
Depreciation and amortization (only
in 2018)
Working capital as % of revenue (2019-
2032)
Increase in working capital (only in 2018)
Capex as % of revenue (2019-2032) Capex (only in 2018)
85 against 6
Residual Earnings Analysis
Assumed Variables Specified Variables
Terminal growth rate Equity
Profit margin (2018-2021) Addressable markets of Imaging,
Diagnostics and Advanced
Therapies

42
Market shares of Imaging,
Diagnostics
and Advanced Therapies
CAGRs of Imaging, Diagnostics and
Advanced Therapies
7 against 7

43
5.3.2 Our Suggestion: Don’t Buy
(in millions) Market Shares
Imaging 31%
Diagnostics 15%
Advanced Therapies 32%
Addressable Markets (given in the case)
CAGR 2016 2017 2018 2019 2020 2021
Imaging 3% 17000 17510 18035.3 18576.36 19133.65 19707.66
Diagnostics 5% 30000 31500 33075 34728.75 36465.19 38288.45
Advanced Therapies 4% 3000 3120 3244.8 3374.52 3509.57 3649.95
Revenue
Imaging 5270 5428 5590 5758 5931 6109
Diagnostics 4500 4725 4961 5209 5469 5743
Advanced Therapies 960 998 1038 1079 1123 1167
Total Revenue 10730 11151 11590 12047 12524 13020
Profit margin 18.30% 18.30% 18.30% 18.30% 18.30%
Net profit 2121 2204 2291 2382
Particulars (in millions)
Forecasted period
Mar 16, 2018 2018 2019 2020 2021 TV
CSE 29100 31221 33426 35718 38101
Cost of Equity 8.3% 8.3% 8.3% 8.3%
Benchmark Income 1912 2591 2774 2964
Net Profit 2121 2204 2291 2382
Retained Earnings 2121 2204 2291 2382
Residual Income 208 -386 -482 -581
PV of Discount Factor 0.94 0.87 0.8 0.74
PV of residual income (Finite time-
frame) 197 -337 -388 -432
Perpetual growth rate / Terminal
growth rate 2%
Terminal value (infinite time-frame) 9419
PV of terminal value -7008
Equity value 21130
Number of stocks outstanding 1000
Value per share 21.13
Price on April 20th, 2018 32.7
Verdict DON'T BUY

44
Based on our assumptions, we advise not to purchase shares of Healthineers because we
think the intrinsic value is way less than the market price. It could be that there are
substantial errors in the assumptions or it could be that the market is just acting up for
some reason. But we do know for sure that this model undermines the future outlook of
Healthineers.
5.3.3 When to Buy
Our base residual income valuation model suggests not to buy (or to sell) shares of
Healthineers at €32.7. It is because we have not emphasized the potential of Healthineers
in the coming years. Its Vision 2020 could pay-off, its Atellica digital platform could
change the market, it could take measures that would ensure market leadership for long
term etc. The base model basically downplays the valuation. So we attempted to know
what the value per share would be if we account for the potential. There are 3 things we
can do to address the potential. They are:
1. Terminal value could be increased to 3% or more.
2. Its market share in each segment could be increased and
3. Its profit margin could be increased from 18.3%.
We have chosen to increase the market share of Healthineers in the Diagnostics segment
to 30% at the end of year 2021. This would go up gradually, increasing by 5% every year.
Why did we assume Healthineers would grow in this particular segment of the market?
We believe that Healthineers is comparatively weak in the Diagnostics segment.
Compared to market shares in Imaging and Advanced Therapies (in percentages, not in
absolute values), Healthineers had almost half of that in Diagnostics. We believe
Healthineers would want to capture a substantial portion of the addressable market. In
fact, one of the reasons it went public is to realize its goal of becoming the market leader.
To achieve this goal, it would take necessary measures including acquiring start-ups. So:

45
Addressable Markets (given in the case)
(in millions) CAGR 2016 2017 2018 2019 2020 2021
Imaging 3% 17,000 17,510 18,035 18,576 19,134 19,708
Diagnostics 5% 30,000 31,500 33,075 34,729 36,465 38,288
Advanced Therapies 4% 3,000 3,120 3,245 3,375 3,510 3,650
Shares of Healthineers
Imaging 31% 31% 31% 31% 31% 31% 31%
Diagnostics 15% 15% 15% 15% 20% 25% 30%
Advanced Therapies 32% 32% 32% 32% 32% 32% 32%
Revenue
Imaging 5,270 5,428 5,591 5,759 5,931 6,109
Diagnostics 4,500 4,725 4,961 6,946 9,116 11,487
Advanced Therapies 960 998 1,038 1,080 1,123 1,168
Total
Revenue
10,730 11,152 11,591 13,784 16,171 18,764
Profit margin 18.30% 18.30% 18.30% 18.30% 18.30%
Net profit 2,121 2,523 2,959 3,434
The valuation is:
Particulars (in millions)
Forecasted period
Mar 16, 2018 2018 2019 2020 2021 TV
CSE 29,100 31,009 33,279 35,943 39,033
Cost of Equity 8.3% 8.3% 8.3% 8.3%
Benchmark Income 1,912 2,574 2,762 2,983
Net Profit 2,121 2,523 2,959 3,434
Retained Earnings 1,909 2,270 2,663 3,090
Residual Income 209 (51) 197 451
PV of Discount Factor 0.946 0.874 0.807 0.745
PV of residual income (Finite
time-frame) 198 (45) 159 336
Perpetual growth rate / Terminal
growth rate 2%
Terminal value (infinite time-
frame) 7,295
PV of terminal value 5,433
Equity value 35180
Number of stocks outstanding 1000
Value per share 35.18
Price on April 20th, 2018 32.7
Verdict BUY

46
Our analysis suggests the intrinsic value of one share of Healthineers is higher than
market price on April 20th, 2018. The reason why the difference is modest is because we
have assumed in a conservative manner. We can change any of the variables drastically
and it’d give us a value that is way higher than the market price.
How certain are we about this value? We have run 100,000 trials in Crystal Ball and found
that the probability of value per share to be higher than €32.7 on April 20th, 2018 is
78.752%.
Graph: Probability distribution of value per share under residual earnings valuation mod

41
Chapter-6
Conclusion

42
Healthineers, a company full of potential in the health care industry, is about to go public
with the help of big players such as Deutsche Bank, JP Morgan Chase and Co., BNP Paribas
etc. This case makes us look into valuations provided these institutions and question
everything. The overall theme of this case was, we believe, is to ask whether the
valuations are consistent with the reality. As analysts, we have scrutinized every aspect of
the IPO process, valuations and potential of Healthineers to the last bit. Sadly, we have
not made any recommendations. Because we believe the choice resides with the
investors. We just unearthed everything that an investor should know before investing in
Healthineers. For example, that the reasonable estimated equity value per share is
€29.34 on an average. And at the same time, reasonable estimated enterprise value of
Healthineers is €35784 on an average. Our DCF analysis shows us that the model is too
much speculative. Just 1% change in the values produce a value per share that is around
50% lower than the base case in the pessimistic scenario and around 100% higher than
the base case in the optimistic scenario. We have also shown that the valuations provided
in the case do not account for acquisition of start-ups. Our residual earnings model
suggest the buy-side analyst mentioned in the case to not buy shares of Healthineers as
the market price of €32.7 is much higher than the calculated intrinsic value which is
€21.13. We have concluded that investing in Healthineers would be justified it can show a
promising future (such as increasing market share, acquiring promising start-ups, increasing
profit margin etc.

43
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