Company Overview: Probiotec Limited (ASX: PBP) is engaged in manufacturing, packaging, and distributing a wide range of drugs and OTC pharmaceuticals. The company is known for the advancement of new pharmaceutical, cosmeceutical and nutraceutical products. PBP offers its products domestically as well as internationally and holds three manufacturing amenities in Australia. The company drives growth both organically and through acquisition by focusing on innovation, quality systems, and customer service.

PBP Details

Strengthening Foothold in Defense Space & Acquisition Synergies Remains Key Catalysts: A leading Australian pharmaceutical company, Probiotec Limited (ASX: PBP), is mainly engaged in production, manufacturing, and distribution of a broad range of medicines and over the counter (OTC) pharmaceuticals. PBP’s business has expanded massively, post the three successful buyouts in the defensive space. During 1HFY20, the company acquired ABS (Aus) Pty Ltd, a leading pharmaceutical and consumer product contract packer operating for more than 40 years. Notably, PBP purchased business assets from Contract Pharmaceutical Services of Australia Pty Ltd (“CPSA”) in December 2019.  In October 2017, the company had acquired South Pack Laboratories. All these acquisitions were in line with PBP’s strategy to strengthen its market position as a leading pharmaceutical company.

Accretive Acquisition (Source: Company Reports)

The year 2020 marked the successful building and opening of acquired adjacent site 85 Cherry Lane of PBP’s main facility in Laverton North. Furthermore, the company summarized various structural changes, which consisted of the successful sale of the remaining brand, Celebrity Slim, while retaining manufacturing on a long-term contract. Due to these operational changes, the company was able to offer a special dividend, and thereafter a share buyback, to enhance shareholders’ value. Notably, in FY20, the company declared a dividend of 4.5 cents per fully paid ordinary share, up 29% year over year. This trend is expected to contribute to further growth in FY21.

Additionally, despite of economic uncertainties, the company has shown various trails to offer robust earnings and remains on track to continue its growth trajectory via acquisitions and site consolidation. The company expects to deliver earnings growth in FY21. In FY20, the Group’s revenue from continuing operations increased ~46% year over year, backed by growth from both existing and new customers, with additional new work coming on board over the second half of the year. Further, acquisitions of ABS and CPSA also positively impacted the results. The company’s vision involves delivering the highest quality products to its clients with exceptional customer service. The company is well-positioned to enhance its capabilities in the market and continues to experience robust 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 its orders.

Looking ahead, the company remains well-positioned to manage the rising cost pressure. The company expects demand for cold & flu related products to fully recover in FY2022. It also expects more than $10 million of recently secured revenue to be onboarded in FY21/22, delivering more than $2 million of EBITDA. Further, the company is likely to benefit from new contract work, organic growth, and new product growth from existing customers in FY21. Synergies from acquisitions, along with cost savings and operational efficacy from the development of 85 Cherry Lane remains a key positive.

The company saw a top-line compound annual growth rate (CAGR) of ~43.2% for a time span from FY18-FY20. EBITDA for the same time period increased at a CAGR of 49.1%. The company is witnessing higher recognition from its customers in relation to PBP’s industry-leading supply performance amid COVID-19 led disruptions. In addition, the company is taking necessary measures to ensure the continuity of supply of critical medicines to address the client requirements.

Sales & EBITDA (Source: Company Reports)

Sneak Peek at FY20’s Key Results: During FY20, the company reported total sales revenue amounting to $107.2 million, up from $73.2 million last year. Underlying EBITDA for the period witnessed a massive growth of 78%, from the prior corresponding period, and came in at $16.9 million. Underlying NPAT for the period stood at $7.8 million, indicating an increase of 91% year over year. Net profit after tax on reported basis came in at $6.4 million, up from $3.74 million reported in FY19. Underlying earnings per share increased 68% year over year and stood at 11.1 cents. Ahead of guidance, these results, depicts the resilience and defensive nature of PBP's business, despite the Covid-19 led disruption caused to all business segments. It demonstrated the leadership of the PBP management team and the commitment and skills of its employees. An aging population, increasing life expectancy, and the shift of patient care towards 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 value-added requirements.

FY20 Key Highlights (Source: Company Reports)

Liquidity Position: The company exited the period with a cash balance of $6.3 million. The company’s total debt at the end of the period came in at ~$38 million. Operating cash inflow in FY20 came in at $10.2 million. The company presently maintains a conservative balance sheet following the sale of assets recently. It also has a strong cash-flow generation. In September 2019, the company raised capital amounting to $10.56 million, partially deployed for CPSA asset acquisition, and strengthening its balance sheet. PBP remains well-positioned for future growth and remains open to utilise its debt capacity to fund initiatives that are accretive for shareholders' returns.

Cash & Debt Highlight (Source: Company Report)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 51.43% of the total shareholding. Inston Pty Ltd. has the maximum shares in the company at 9.78%. Paradice Investment Management Pty. Ltd. is the second-largest shareholder, with a holding of 7.75%.

Top Ten Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: In FY20, the company had an EBITDA margin of 15.8%, higher than 13.2% in FY19. Operating margin and net margin for the period stood at 8.3% and 6.0%, higher than the FY19 figures of 6.2% and 5.1%, respectively. ROE came in at 11.7% in FY20, which increased from FY19, F18 and FY17 figures of 7.3%, 8.8% and 6.3%, respectively.

Key Metrics (Source: Refinitiv, Thomson Reuters)

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. The company has a debt-loaded balance sheet. As of 30 June 2020, total debt stood at ~$38 million (including financial leases) while cash and cash equivalents amounted to $6.3 million.

Future Expectations: 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. 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, these strategic initiatives are likely to result in new sources of revenue for the company in near future. The company also stated that it has observed an upliftment in orders, relating to cough, cold & Flu, and immunity products. The increased level of demand for these products is likely to continue through FY21.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: PBP’s stock price has corrected 11.7% over the past six months. The company has an annual dividend yield of 2.55% and a market capitalisation of ~$131.61 million. Currently, the stock is trading below the average of its 52-week high and low level of $2.480 and $1.550, respectively, offering an opportunity for share accumulation. On a technical front, the stock of PBP has a support level of ~$1.671 and a resistance level of ~$1.953. PBP remains well-organized as all its manufacturing and packing sites remained fully functional throughout the COVID-19 crisis. Further, it is taking the essential actions to manage the current situation and continues to trade firmly despite these tough periods. We have valued the stock using EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit growth (in percentage terms). For the purpose, we have taken peers such as EBOS Group Ltd (ASX: EBO), Mayne Pharma Group Ltd (ASX: MYX) and Ansell Ltd (ASX: ANN), which come under the healthcare sector. Considering the recent developments, optimistic outlook for FY21 and beyond, expected acquisition synergies, and current trading level, we recommend a “Buy” rating on the stock at the current market price of $1.76 on 14 October 2020.

PBP Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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