Introduction
DiaSorin (OTCPK:DSRLF) is an Italian company and world leader in the in vitro diagnostic area as the company has decades of experience in producing the reagent kits used by laboratories all over the world. By continuously building out its presence and product offering, DiaSorin is now the company with the broadest range of tests available. In 2020 for instance, DiaSorin developed a diagnostic test to detect the COVID-19 virus and this obviously has helped the company’s 2020 performance.
Source: annual repot 2020
But DiaSorin is clearly more than just another COVID-19 bet as the company clearly is the world leader in tests for several other diseases and has recently won approval to market its HIV and Hepatitis tests in the USA. In this article I’ll have a look at DiaSorin’s 2020 results and I will dig a bit deeper into the recently announced acquisition of Luminex Corporation (LMNX).
Source: Yahoo Finance
As DiaSorin is an Italian company, I’d strongly recommend to use its primary listing in Milan as the liquidity is clearly superior. DiaSorin is listed with DIA as its ticker symbol and the average daily volume of in excess of 200,000 shares represents a monetary value of about 30 million euros per day. The current market capitalization of the company is just under 8B EUR.
2020 was a great year for DiaSorin which appeared to remain insulated from the economic fallout
In 2020, DiaSorin reported a total revenue of just over 881M EUR, an increase of approximately 25% compared to the previous year. As the COGS increased by a roughly similar percentage, there was virtually no impact on the gross margin as the gross profit increased from 489M EUR to just under 603M EUR.
Where DiaSorin’s efficiency engine kicks in is the EBITDA and EBIT level. While the COGS will always show a direct correlation with the reported revenue, DiaSorin’s fixed expenses (staff, R&D) barely changes. As you can see on the image below, the sales and marketing expenses increased by just 1% while the G&A expenses also increased by just about 3%. The result is an EBIT which increased by almost 50% thanks to DiaSorin’s very efficient year.
Source: annual report 2020
With virtually no interest expenses and a very reasonable corporate tax rate, DiaSorin reported a net income of almost 250M EUR, or 4.53 EUR per share. A good result but at a share price of just over 140 EUR, we can’t really say DiaSorin is cheap.
And given the low amount of depreciation expenses, we also can’t really say DiaSorin’s free cash flow result is exceeding the reported net income by a wide margin. In 2020, the company reported a 320M EUR adjusted operating cash flow (including the amount of taxes due rather than the total amount of taxes paid). The total capex increased to 75M EUR (due to a high investment in intangibles), resulting in a free cash flow result of approximately 245M EUR. Which is almost exactly the same as the reported net income.
Source: annual report 2020
DiaSorin is generating very high EBITDA and free cash flow margins (as in excess of 25% of the revenue gets converted into free cash flow) and that’s likely the main reason why the company is trading at a premium valuation.
The recent acquisition: expensive but it has potential
DiaSorin is printing cash and thanks to its status as recognized world leader in its domain, we can expect the strong cash inflow to continue in the foreseeable future. While DiaSorin also invests in organic growth (with an R&D budget of approximately 50M EUR per year), it sometimes identifies M&A targets that will expand and complement its existing product offering.
In April, the company announced it has entered into an agreement with Luminex Corp. which agreed to be sold for $37/share in cash. This was a 23% premium to the closing price of the Luminex stock before the rumors about a potential acquisition started to swirl around. DiaSorin is very interested in adding more quality to its molecular diagnostics division while it was also looking to expand in the United States and that made Luminex a logical fit. The deal has a value of approximately $1.8B although Luminex’s cash generation abilities likely indicate the final valuation may be a bit lower.
While paying $1.8B seems to be quite high for a company which generated$78M in operating cash flow and $60M in free cash flow in 2020, DiaSorin obviously expects to unlock some synergy benefits (as certain operating expenses could be pooled while there should be some cross-selling opportunities as well.
Source: annual report Luminex Corp. FY 2020
In its press release, DiaSorin confirmed it expects to generate $55M in synergy benefits and I will assume these synergy benefits are based on the EBITDA generated by Luminex. Considering Luminex reported an EBITDA of just over $70M in 2020 (making the EV/EBITDA ratio of the deal based on a $1.8B acquisition cost approximately 25), the post-synergy EBITDA expected at Luminex will increase to about $125M which is just over 14 times EBITDA (and excludes growth outside of synergy benefits).
According to DiaSorin the combined entity would have generated a pro forma EBITDA of 472M EUR in 2020 and this amount will obviously increase in the next few years as DiaSorin continues to pursue growth
Investment thesis
It’s a pity DiaSorin doesn’t have a strong US listing as I think the company should be using its strong share price and expensive valuation as a currency to pursue M&A rather than pursuing an all-cash transaction with Luminex. While the balance sheet is strong with in excess of 300M EUR in net cash, the EV/EBITDA before the Luminex acquisition was approximately 19 and although DiaSorin definitely deserves a premium valuation I’m not a buyer at the current valuation.
Upon completing the Luminex deal, DiaSorin will have an enterprise value of approximately 9B EUR and will be trading at an EV/EBITDA ratio of about 19. This will obviously decrease as it unlocks the synergy benefits expected from the Luminex acquisition and as the strong free cash flow will help to rapidly reduce the net debt, but despite this I’m still on the sidelines. It’s a great company but I’m hoping to pick it up a bit cheaper than where it’s trading at now.
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