Company Overview: AFT Pharmaceuticals Limited (ASX.AFP) is a pharmaceutical company with a broad range of products, including proprietary and in-licensed products from third parties. The company’s products consist of key pharmaceutical distribution channels such as over the counter (OTC), prescription, and hospital. The company operates in Australia, New Zealand, and in certain Southeast Asian markets.

AFP Details

AFP Rides on Geographical Diversification & Distribution Deals: The company started FY21 on a decent note, delivering record revenue and doubling its underlying earnings, thus, highlighting the strength of AFP’s market-leading position along with continued growth in demand for its portfolio of over the counter and prescription medicines.

Key Findings from FY21 Results:

• Strengthening International Presence: AFP’s Australasian and New Zealand business performed well in FY21. During the period, the company witnessed a growth of 11% year over year from the Australian region, which came in at NZ$68.3 million. The increase was aided by product and channel diversity. Revenues from New Zealand business increased by 1%. Overall sales to the rest of the world stood at NZ$9.9 million, up 8% year over year.
• Increase in Total Operating Revenues: In FY21, the company’s total revenues rose by 7% year over year and came in at NZ$113.1 million, owing to expansion across business segments, growth in the key Australian market and rise in product sales to the Rest of the World. Notable, Product sales grew by 52%, driven by Maxigesic.
• Rise in Underlying Profit After Tax: In FY21, the company’s underlying profit after tax more than doubled year over year to NZ$7.8 million, owing to financing cost savings attained from the streamlining of debt in early 2020.
• Momentum in Maxigesic Commercialisation: Recently, the company made new registrations for Maxigesic in South Korea, Panama, Chile, and Peru. The company also expanded its Maxigesic’s foothold across Europe and expanded its EU business development team, bringing the total number of employees in that market to three. The registration fortifies that the Maxigesic IV will now be accessible in 26, up from 21 countries, at the end of March 2021. This also depicts a key milestone towards AFP’s goal of selling the medicine in more than 50 countries by the end of FY22, up from 43 countries at the end of FY21.
• Increase in Total Assets: At the end of FY21, total assets stood at NZ$105 million, up from NZ$87.1 million at the end of FY20, owing to NZ$10.9 million boosts in inventories to protect supply disruptions.
• Capital Raising & Decline in Net Debt: In FY21, the company raised ~NZ$12 million capital in order to remain well funded to expand the product development and invest higher in expanding its geographical footprints. Net debt at the end of FY21 reduced to NZ$35.2 million from NZ$37.1million at the end of FY20.

The below picture depicts a continuous growth trajectory in AFP’s operating revenues since 2010.

Revenue Trend; Analysis by Kalkine Group

Key Metrics: For FY21, the company reported ROE of 28.9%, higher than the industry median figure of 13.3%. In FY21, the company recorded debt-to-equity ratio of 1.15x compared to the FY20 figure of 3.03x.

Profitability and Leverage Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 81.3% of the total shareholdings, while the top 4 constitute the maximum holding. Atkinson (Hartley Campbell) is the entity holding maximum shares in the company at 69.46%. Accident Compensation Corporation is the second-largest shareholder, with a holding of 4.18%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:

• COVID-19 Led Uncertainties: The company is exposed to the prevailing global uncertainties related to COVID-19 and other geopolitical tensions.
• Stiff Competition: The company is exposed to stiff rivalry from competitors developing similar product lines and services.
• Leveraged Balance sheet: A highly leveraged balance sheet might weigh on the company’s financial performance.
• Liquidity Risk: Further, lower investment in generating working capital requirements exposes the company to liquidity risk.
• Rising Expenditure: The company also increased investment in R&D, to achieve its growth plan, which might weigh on margins, going forward.

Outlook: The company remains on track to witness continuous future growth opportunities in operating earnings and cashflow, given new product developments, licencing deals, and geographical expansion. The worldwide market for the Maxigesic family of medicines is projected to achieve US$59.5 billion by 2026. AFP’s effort to expand its foothold in the commercialisation of Maxigesic, is expected to provide a decent growth pipeline of opportunities for future goals. The company remains optimistic about the progress of global health authorities in key markets to carry out vaccination programmes. This, in turn, is expected to drive AFP’s international sales in the number of new countries, along with growing sales in newly launched markets such as Germany, Canada, Switzerland, the US, Western Europe and China. AFP further targets to reduce its net debt by $25 million - $30 million. The company is targeting continuing operating profit between NZ$18–23 million in FY22, depicting a rise of 40.5%-53.43% over FY21. The company is set to report its 1HFY22 results on 18 November 2021.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of the company has been corrected by ~13.79% in the past three-months. Currently, the stock is trading below the average of its 52-week high and low levels of $5.25 and $3.64, respectively. The stock has been valued using the P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount as compared to its peers’ median P/E multiple, considering a leveraged balance sheet, increased investment in R&D, challenging global environment, stringent regulatory requirements, changing customer preference, supply chain disruptions, etc. For this purpose of valuation, peers such as Clinuvel Pharmaceuticals Ltd (ASX: CUV), Australian Pharmaceutical Industries Limited (ASX: API), Probiotec Limited (ASX: PBP), and others have been considered. Considering decent revenue base, positive outlook, cash management activities, current trading levels, valuation, international expansion, robust product adoption, and the key risks associated with the business we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $3.75 as on 13 October 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia.

AFP Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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