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 MARKET REPORTS |
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Stocks
Stock of the week – Australian Pharmaceutical Industries
January 15, 2009
Tim Morris, wise-owl.com analyst
Company: Australian Pharmaceutical Industries
Code: API
Recommendation: None
Market Cap: $126m
In September we initiated coverage on Australian Pharmaceutical Industries (API), flagging the stock as a potential turnaround candidate after years of relegation in the proverbial ‘dog kennel’. For the uninitiated, API is one of the oldest operators in Australia’s healthcare space. Founded in 1910, it initially became one of Australia’s leading pharmaceutical distributors. Today it has developed into one of Australia’s leading beauty and health retail companies, servicing over 4000 independent pharmacies through its distribution arm, while also owning the Priceline retail store brand, a leading health and beauty brand, flagged as the fasted growing retail format in Australia.
Although the stock was placed ‘on the radar’, we advised that we were awaiting full year results before making a judgment call on the stock’s near term fortunes.
Well, full year results have been announced and the share price has halved since our first report. Does this present an even greater opportunity or is it a warning that more challenges lie in store? After looking at API’s full year accounts, the share price fall has been somewhat justified.
Accounting blunders, inventory write downs and a shift in the company’s reporting period from an April to an August financial year, have created a very murky background for investors assessing the company’s relative financial performance over the last few years.
A return to ‘the black’ in FY08 yielded a marked improvement over the previous year’s loss, however profitability remains significantly below yesteryear. Generating NPAT of $15.2m, profit margins remain wafer thin (0.47%), several times lower than what the company has achieved historically. A look ‘between the sheets’ also brings the quality of the FY08 result into question. 70% of the $15.2m profit result was driven by the sale of company-owned Priceline stores to franchisees. While there may be more company-owned stores in the pipeline for sale, these asset disposals are non operational and therefore aren’t sustainable.
Ignoring this fact puts the stock on a PE of 8 based on reported EPS of 5.9c. However this seemingly attractive value is illusory. If asset sales are excluded, we estimate that EPS would have been closer to 1.8c, which would put the stock on a PE of 27. This is hardly cheap, which is why the stock has continued to decline in recent months.
Source: Bloomberg
But even though evidence was hard to come by this time around, the company still holds the potential to extract much greater earnings from its businesses in future years. The turnaround process we discussed in our last report remains underway, and the company has reassured the market that it has no need to raise equity capital. The company intends to fund its supply chain improvement program via existing debt facilities.
Major shareholders seem to recognise this upside potential in the business (and the share price). Cornerstone investor, Washington H. Soul Pattinson, retail mogul Solomon Lew, and value fund Schroder, have all increased their shareholding in 2008. However we have yet to see any additional buying following the full year result. This has seen the stock fall back in line with its current fundamentals, such as its ‘underlying’ earnings.
API’s future potential hasn’t disappeared, but until the improvement in earnings is driven from the operational level, the market is unlikely to re rate the stock. Being cautious has thus far paid off, and at this stage API still doesn’t appear ‘ripe’ for the picking. We will continue to monitor its progress, but following the latest result, we would be reluctant to recommend members buy in the absence of share price consolidation.
Tim Morris is an analyst at wise-owl.com, one of Australia's leading independent stockmarket research houses. Click here for your complimentary report.
More articles from this edition of CompareShares:
Stocks: Fast turnaround stocks
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Top Ten: CFDs - top five shorts and top five longs for the week
Stocks: Stock of the week - Australian Pharmaceutical Industries
Markets: World markets sharply down
Companies: Rio Tinto cuts Argyle production, jobs
Economics: Australia set for zero 09 growth
US: US retail sales plummet 2.7% in December
Companies: Woolworths 'a super-sales retailer'
Global Crisis: Nortel files for bankruptcy in N America
China: China becomes third largest economy
Credit Crisis: Deutsche Bank loses $A10b in 4th quarter
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