Company Overview: Probiotec Limited (ASX: PBP) is a manufacturer, packer, and distributor of a broad range of drugs and OTC pharmaceuticals. The company is listed on the Australian Stock Exchange (ASX) since November 2006 and is known for the development of innovative new pharmaceutical, nutraceutical and cosmeceutical products. Notably, PBP holds three manufacturing amenities in Australia and provides its products both domestically and internationally. The company drives growth both organically and via acquisition by focusing on innovation, quality systems and customer service.
 


PBP Details

Higher Organic Growth & Synergies From Acquisitions Are Key Catalysts: Probiotec Limited (ASX: PBP) is one of the top Australian pharmaceutical companies, which is engaged in manufacturing, and distributing a wide variety of medicine and over-the-counter (OTC) pharmaceuticals, thereby balancing medicines and consumer health products. In FY19, the Group’s revenue from continuing operations soared 19% over the prior corresponding period, mainly driven by growth from both existing and new customers, with additional new work coming on board over the second half of the year. The company is well-positioned to enhance its capabilities in the market and continues to experience strong levels of sales inquiries, leads and contracted work. The demand for the company’s manufacturing services and product development capabilities continues to grow, thereby boosting orders. This trend is expected to contribute further growth in FY20.
 
An aging population, increasing life expectancy and the shift of patient care toward lower cost settings, have fuelled the demand for healthcare services. Further, increasing awareness and desire for high quality Australian made products are driving the need for a portfolio of quality products and experienced management team. PBP has grown to meet these increasing requirements.
 
The company has witnessed robust organic growth supplemented by accretive acquisitions. The company completed the acquisition of ABS (Aus) Pty Ltd in July 2019. ABS is a top pharmaceutical and consumer product contract packer operating for more than 40 years. It is worth mentioning that in December 2019, the Company acquired the business assets from Contract Pharmaceutical Services of Australia Pty Ltd CPSA (“CPSA”). Both these acquisitions were in line with PBP’s strategy to strengthen its market position as a leading pharmaceutical company.
 
For the six months ended 31^st December 2019, the company reported a growth of 34% in sales revenue to ~$44.1 million. The company’s organic revenue grew 17%, on the back of growth from existing and new customers. This growth was supplemented by the acquisition of ABS (Aus) Pty Ltd during the half year. 
 
Going forward, the company plans to make higher investments to deliver high quality products to its clients with exceptional customer service. PBP continues to focus on cost control measures, while investing to support its growth outlook.The company is also taking necessary measures to grow organically in the short term, improve operational efficacy, thereby striving to be Australia’s largest pharma contract manufacturer and packer. Eventually, the expenses incurred to support these strategic initiatives are likely to result in new sources of revenue for the company in near future.
 
Coming to the past three-years performance over the period covering FY16 to FY19, PBP witnessed a top-line CAGR of ~6.4%. Basic earnings per share stood at 11.7 cents per share, as compared to 3.2 cents per share reported in FY16. Profit attributable to shareholders over the same time span witnessed a CAGR of ~41.4%, with FY16 and FY19 profit amounting to $4 million and $11.3 million, respectively. A final dividend of 2.5 cents per fully paid ordinary share was declared for the financial year ended 30 June 2019.
 

Sales, EBITDA, Dividend Trends (Source: Company Reports)

1HFY20 Financial Highlights for the period ended 31 December 2019: During the period, the company reported total sales revenue amounting to $44.1 million, signifying a rise of 34% year over year. Underlying EBITDA for the period was $6.2 million, up 68% year over year. EBIT for the period came in at $4.3 million, up 72% year over year. The results were positively impacted by higher organic growth and acquisition synergies. Underlying NPAT came in at $2.4 million, up 85% year over year. Reported NPAT for the period stood at $1.8 million, up 65% year over year. Earnings per share stood at 3.7 cents per share, which soared 92% on pcp. In 1HFY20, the company declared an interim dividend at 1.5 cents per share.
 

1HFY20 Key Highlights (Source: Company Reports)
 
Balance Sheet & Cash Flow Position: At the end of 31 December 2019, the company reported a cash balance of $8.37 million. The company’s total borrowings at the end of the period came in at ~$12.1 million. Operating cash inflow in 1HFY20 came in at $8.3 million, which includes transaction costs of ~$1m, benefited from late customer receipts from prior year. Net cash outflow from investing activities amounted to $22.9 million in 1HFY20, whereas net cash provided by financing activities stood at $14.2 million. During the period, the company’s capital raising amounted to $10 million, partially deployed as part of CPSA asset acquisition in December 2019. PBP remains well-positioned for future growth, on the back of significant capacity at all sites following increased CAPEX spend in prior years, which is expected to decrease in future years in the absence of major growth projects.
 

Cash Flow Details (Source: Company Reports)

COVID-19 Update: In the current uncertainty led by coronavirus outbreak, the company remains well established, with all its manufacturing and packing sites to remain fully operational throughout the pandemic. The company is taking the necessary measures to manage the current situation and continues to trade strongly despite these difficult times. The company opines that it has witnessed an increased level of demand and uplifts in orders, which incorporates cough, cold & Flu, and immunity products. The increased level of demand is likely to continue through 1HFY21.
 
Key Risks: The company’s financial instruments comprise mainly of receivables, payables, bank loans and overdrafts, finance leases, loans from related parties, cash, and short-term deposits. The main risks PBP is exposed to through its financial instruments are foreign currency risk, interest rate risk, liquidity risk and credit risk. PBP has a debt-laden balance sheet. As of December 2019, total debt was $12.1 million while cash and cash equivalents were $8.37 million. 
 
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 47.66% of the total shareholding. 
 

Top Ten Shareholders (Source: Refinitiv, Thomson Reuters)
 
Key Metrics: In 1HFY20, the company had an EBITDA margin of 10.3%, higher than the Dec’18 figure of 7.1%. Operating margin and net margin for the period stood at 5.7% and 4.1%, higher than the Dec’18 figures of 4.7% and 3.3%, respectively. In 1HFY20, current ratio stood at 1.76x, higher than the industry median of 1.69x. 
 

Key Metrics (Source: Refinitiv, Thomson Reuters)
 
Outlook: Going forward, the company remains optimistic about the outlook for FY21 and beyond, as it is witnessing higher appreciation from its customers in relation to PBP’s industry leading supply performance in the COVID-19-led disruption. In addition, the company is taking necessary measures to ensure the continuity of supply of critical medicines to address the client requirements.
 
Despite the rising cost pressures, the company is expecting revenues to exceed $100 million and EBITDA to be between $16 million to $17 million for FY20. It also expects FY20 to benefit from new contract work, organic growth, and new product growth from existing customers. Synergies from ABS buyout, along with cost savings and operational efficacy from the development of 85 Cherry Lane remains a key positive, going forward.
 
The global economy is shaken due to the COVID-19-led disruption. However, one sector that is witnessing industry-wide growth is the healthcare sector. With increasing awareness about the advantages of expert medical caregiving, the need for healthcare medication, workforce or employees has increased substantially. PBP stands to benefit from its planned methods for considering numerous growth opportunities in a very active healthcare sector.
 
It is worth stating that the company stands to benefit from encouraging trends, which include new drug approvals, an accelerated pace of innovation, promising drug launches, growing importance of biosimilars, cost-cutting initiatives, an aging population, expanding insurance coverage, the rising middle-class, insatiable demand for new drug, and an ever-increasing health care spending. 
 

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
 
Valuation Methodology: Price to Earnings Multiple Based Relative Valuation Approach (Illustrative)
 

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv,Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters
 
Stock Recommendation: The stock of the company generated positive returns of 12.54% in the past one year. At the CMP of $1.910, the stock of the company has an annual dividend yield of 2.07%. The company has a market capitalisation of ~$144.32 million and ~74.78 million outstanding shares. Currently, the stock is trading below the average of its 52-week high and low level of $2.480 and $1.495, respectively, proffering an opportunity for share accumulation. Considering the recent developments, optimistic outlook for FY21 and beyond, acquisition synergies and current trading level, we have valued the stock using P/E multiple based illustrative relative valuation method, and arrived at a target price of lower double-digit growth (in percentage terms). Hence, we recommend a “Buy” rating on the stock at the current market price of $1.910, down 1.036% on 6 May 2020.
 
 
PBP Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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