Alcon will be listed on the SIX Swiss Exchange and the NYSE on 9 April 2019. All Novartis shareholders will get one Alcon share for the five Novartis shares held. We broadly value Alcon at $45-49 per share or $9-9.8 per Novartis share, implying a market cap of $22-24bn, using various valuation methodologies.

The DCF-based valuation leads us to a price of $45 per share. From a profitability perspective, considering the growth state that Alcon is in, we have used 2021 as the base value. Using an EV/EBITDA multiple of 14.5x to the 2021 EBITDA – ~20% discount to Carl Zeiss’s multiples – yields us a value of $49 per share. We believe that Carl Zeiss will also continue to trade at a premium due to its exposure to the higher-margin micro-surgery business.

Key assumptions of the DCF valuation

  • Revenue growth: 4% during 2019-29
  • EBIT margin: 2019-22 – average 6%; 2023-29 – average 10%
  • Terminal growth: 2%
  • Net debt: $3bn (as reported in the 20-F filing of Alcon)
  • Number of shares 488.7m

Revenue drivers

We assume Alcon will be able to grow its top-line at 3% during 2019-21 and 4% during 2021-29 – this is in line with the growth rate of the eye care devices market and also largely in line with management’s expectation of mid single-digit CAGR until 2023. Although management will share its strategy later, we don’t see a reason for a significant change from the current one – maybe more of a focus on the execution front. The eye care devices market is divided into surgicals (implantable, consumables and equipment; accounting for 56% of Alcon’s 2018 sales) and vision care (contact lens and ocular health).

The surgical implantable business is expected to grow at a CAGR of 6% during 2018-23, surgical consumables at 3%, equipment at 3%, while the contact lenses (the bigger market) market is expected to grow at 4%. Novartis is the market leader in the $9bn surgicals market and the second largest (after J&J) in the $14bn vision care market. The key driving factor for Novartis would be the advanced technology intraocular lenses (AT-IOLs), which is expected to grow at 11% during 2018-23; it is already the market leader in this space. Overall, the company aims to tap into three driving areas – premium products, international/emerging markets (where contract lens penetration market is 3% vs 16% in the US, and cataract surgery is 3.2% vs 12.7% in the US) and adjacencies.

Proftability assumptions

Our expectation is that Alcon will be able to accelerate the turnaround it has been able to mark in 2018, on the back of innovation and a targeted approach. Also, with the separate listing, we expect a greater focus of effort and resources to play out better in catching up with the lost opportunity. The AT-IOLs should also support margins, since the value per lens goes up by 3-8x mono-focals (currently accounting for 92% of the volume and 70% of the market by value).

Another aspect that works in favour of IOLs is that the trifocals (advanced-IOLs) are yet to tap the opportunity in the US (currently these are predominant in Europe). However, one should note that the competitive landscape in the eye care business is intensifying, implying more challenges and the inability of the company to make similar margins as it did historically (14-16% during 2011-14).

Also, we view it to lag Carl Zeiss’s 14-15%, which is already in a healthy state currently, in addition to its high-margin micro-surgery business. Novartis’s guidance includes core operating margin of low-to-mid 20s by 2023 (from the current levels of 17%). Note that the company adjusts the amortisation figure, which is very high ($1.4bn in 2018) due to a big chunk of intangibles. This explains the big difference between the loss at the reported level and profit at the core level.

We use EV/sales to validate our DCF price – $45 per share translates into 3.4× 2019 sales, reflecting ~29% discount to Carl Zeiss’s 2019 EV/sales. We see this as fair, considering the healthy state at Carl Zeiss and Alcon’s transition phase.