Thursday 22 March 2018

Healthcare sees Philips shine under a new light

John Lynch

If your game is technology, it seems to me that these days you can nod off after a nice lunch and before you get your thoughts together again, your world could have changed. That certainly has been the case with the company we once knew as Philips of Eindhoven.

At any time since the 1930s, Philips was the ever-present name on the shelves of the electronics stores. It was the company that invented fluorescent tubular lighting, which brightened our lives; it gave us the Philishave, the product that kept Europe beardless until recently. It was also the first with audio cassettes and as the name suggests it was responsible for Philips Records, whose first big hit was the immortal Frankie Laine's 'I Believe'. But having made such an outstanding contribution to popular culture, it has now divested itself of its electronics empire and has refocused on healthcare technology.

It is still a significant company. Even in its current slimmed down form it boasts a market capitalisation of €30bn with production plants around the globe, service outlets in 100 countries, and holds 54,000 patents, 39,000 trademarks and 4,400 domain names.

The Dutch company earned its iconic status in its remarkable century-and-a-quarter of existence. You lose count of its breakthrough products. It even got lucky with a tip-off that the Germans were about to invade the Netherlands and spirited its senior family management to America and secured the business from the Dutch Antilles during WWII.

Back in Eindhoven post-war, the group concentrated on brown and white goods. For a period it dominated the European white goods market, but following intense competition from Italian companies it threw in the towel, selling to the US concern Whirlpool in 1991. Three years later it offloaded its semiconductor business NXP and by the end of the century it also exited the record business (a business that produced the work of great artists like The Singing Nun, and Val Doonican).

Its retreat from the brown goods business was long and tortuous.

Its dominance had been challenged by the Japanese with brands like Sony, Sanyo and Panasonic only to be replaced by the Korean's Samsung and LG. Philips, in the face of depleted margins, finally gave up the ghost in 2012.

To show that business has little sentiment, in the middle of last year its lighting business was listed on the Amsterdam Stock Exchange, so ending its long history as a light bulb producer. After the stock exchange listing it retained 70pc of the stock of Philips Lighting (which it intends reducing) and continues to consolidate its results in the group accounts.

To complete its exit from the electrical business, it sold 80pc of its US-based car lighting business to a private equity group, Apollo. The deal worth $2bn (€1.7bn) was at a 40pc discount to a Chinese bid that was blocked by US authorities.

Last year was a defining moment for Philips as it completed its de-conglomeration and transformed itself into a focused leader in the healthcare sector.

This pleased investors, driving up its share price to €33, the highest in the last five years. However, its price earnings multiple is an elevated 27. Sales last year were €24.5bn, of which its healthcare portfolio contributed €17bn, up 5pc on the year, with profitability increasing significantly.

Philips management has been working hard to address its legacy liabilities of pensions, contingent liabilities and is buying back expensive debt. Today it has a strong balance sheet and surplus cash which could be used to buy back its shares.

The group's recent acquisition of Volcano has been a success, although some are warning that the current high valuations of targets could be an issue, but the share is worth having.

It is rumoured that the aggressive activist shareholder Third Point, run by Daniel Loeb, is buying Philips shares.

The size of the stake is unknown, but if the gossip has any foundation, expect some bellowing at the gates of Philips' headquarters in Amsterdam.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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