Aspen Pharmacare unaudited interim financial results

Shares in Aspen Pharmacare Limited (Aspen) plunged as much as 44% down to R78.00 per share after the pharmaceutical company’s interim results disappointed the market. This is down from a close of R140.33 the previous day. The group released its results this morning and the bears have entered the market with massive force. This is the biggest decrease in the share price for Aspen since 1998. The share has been in and out of volatility auction throughout the trading day. The share price has recovered back to around the R100.00 level as of 12:35 pm.

The group reported that revenues grew 1% to R19.7 billion with normalized headline earnings falling 9% to R3.6 billion. Borrowings increased by R6.7 billion to R53.5 billion, leaving the company highly geared and exposed to more financial risk. This has undoubtably worried investors as the share price continues to plunge.

Key Insights

• Aspens slumps to low of R68.81 after earnings release
• Marginal recovery with share price trading at R99.00 as at 12:30 am
• Proceeds from disposal of Nutritionals business delayed
• De-leveraging the balance sheet a high priority

Financial Highlights – Six months ended 31 December 2018

• Revenue up 1% to R19 673 million (2017: R19 509 million)
• Gross profit up 2% to R10 236 million (2017: R10 049 million)
• EBITDA down 3% to R5 534 million (2017: R5 711 million)
• Operating profit down 6% to R4 420 million (2017: R4 701 million)
• Headline earnings down 19% to R2 937 million (2017: R3 645 million)
• Profit for the period from continuing operations down 16% to R2 871 million
• Normalised HEPS down 9% (6% in constant currency) to 743 cents (2017: 814 cents)
• Operating cash flow per share of 317 cents representing 47% rate of conversion of operating profit.

Analyst Ratings

The consensus analyst ratings from Bloomberg comprise of 5 buys, 5 holds and 1 sell as of 8 March 2019. The 12-month target price consensus is R186.24, compared with a reference price of R86.00, this represents a potential return of 116.6% should the stock be bought at the reference price. The last 12 month return on the stock has been -66.5% at the abovementioned reference price.

Source: Bloomberg

Comparison with Adcock Ingram – Full Year Period

*All amounts in ZAR

Segmental Performance

Sterile Focus Brands

Revenue remained constant with the prior period at R7.8 billion with gross profit improving to R4.3 billion. The higher gross profit margin was as a result of the lower Thrombosis manufacturing costs. The Sterile Focus Brands comprise of the Anesthetics and Thrombosis portfolios.

Anesthetics Brands

This segment has struggled with ongoing supply constraints affecting all of its major operating regions, except Japan. Revenue was 1% lower at R4.4 billion, but this is a solid result given the supply issues faced. China and Latin American were up 6% and 22% respectively, driving growth in the segment. In Japan, the benefit of strong volume gains were offset by price decreases throughout the period. The groups opinion is that supply should improve by 2020 and be unconstrained from thereon out.

Thrombosis Brands

Revenue remains unchanged at R3.4 billion compared with the prior period. Emerging markets outperformed developed markets with former up 7%, driven by strong growth in China.

Other Pharmaceuticals

Revenue remained unchanged at R11.9 billion, comprising of Regional Brands and Manufacturing.

Regional Brands

Regional brands comprise 45% of the groups revenue and grew at revenues at 3% over the period. Revenue growth was hampered by poor performance by the oncology portfolio in Europe which diluted margins. Growth was realized in all other territories.

Manufacturing

Manufacturing was hit hard by the tough trading and economic environment. Revenues declined 10% to R3 billion coupled with lower volumes over the period. The group also lost a major tender and had to suspend the sale of heparin to third parties which contributed to the decline in growth, with resultant lower volumes squeezing margins further.

Funding and Balance Sheet Concerns

Borrowings increased by R6.7 billion to R53.5 billion over the period, with the increase comprising of R4.9 million of acquisition payments, CAPEX of R1.5 billion and R1 billion as a result of Rand weakness. Operating cash flow per share of 317 cents represents a 47% rate of conversion of operating profit. Net interest paid is covered 5 times by EBITDA.

De-leveraging the balance sheet remains a key priority for Aspen. Long term debt is sitting at R46.73 billion contributing to a debt to equity ratio of 116.83%. The result is that Aspen is highly geared and therefore exposed to much more financial risk. In turn, shareholders would require a much higher return on investment to warrant the high financial risk. It is therefore critical for future investment that Aspen de-leverage their balance sheet, in order to attract future shareholder investment.

The group has already taken steps to accelerate the de-leveraging process. The pending receipt from the disposal of the Nutritionals business is estimated to result in inflows of around EUR 635 million. In addition, the divestment of the non-core pharmaceutical portfolio in the Asia Pacific region will result in further inflows. CEO Steven Saad has stated that this is one of his major priorities for the group going forward and we can expect further divestments to come.

Research compiled by Tyron Searle, IG Trading services.