Morgan Stanley Gets Bullish On Valeant

Financial concerns surrounding Valeant Pharmaceuticals Intl Inc VRX should alleviate as the company renegotiates covenants and pays down debt, and “deleveraging should drive equity value accretion,” Morgan Stanley’s David Risinger said in a report. He upgraded the rating on the company from Equal-weight to Overweight, while raising the price target from $33 to $42.

Easing Financial Concerns

Valeant’s seems to have a “clearer vision” under its new CEO Joe Papa to improve its financial prospects, Risinger commented. He added that management should be able to renegotiate debt covenants for a low amount, estimated at an incremental $60 million in annual interest expense. Moreover, Valeant should be able to improve operating income & cash flow, and pay down debt.

Equity Value To Increase

“As the company delevers, this can drive significant equity value accretion,” the analyst wrote. He further stated that even if Valeant’s Enterprise Value does not change, deleveraging would result in higher equity value accretion.

“Simple math on stability: if we assume that Valeant's enterprise value were to remain constant, each $2B in organic (non-divestiture) free cash flow could effectively increase current equity value of $9.3B by >20%. We project 4-yr (2017-2020) FCF of $9B, net of estimated outflows of $2B for investigations/litigation, $1B for cap ex, and $1B for contingent consideration,” Risinger stated.

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