Company Overview: Probiotec Limited (ASX: PBP) manufactures and distributes a broad range of drugs and OTC pharmaceuticals. The company is known for the development of new pharmaceutical, cosmeceutical, and nutraceutical products. It extends its products both domestically and internationally. The company drives growth organically as well as via acquisition by focusing on innovation, quality systems, and customer service.

PBP Details

Encouraging Outlook & Acquisition Synergies to Aid PBP: Despite economic uncertainties, PBP has shown various trails to offer robust earnings and remains on track to continue its growth trajectory via synergistic acquisitions and site consolidation. In addition, the company is witnessing higher recognition from its customers in relation to PBP’s industry-leading supply performance amid COVID-19 led disruptions.

PBP Key Strategies to Enhance Shareholders’ Value:

• Delivering Quality Product: PBP’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 experience robust sales inquiries, leads, and contracted work.
• Acquisition Spree: In January 2021, the company acquired entire shares of Multipack-LJM. With this integration, PBP expects sales revenue from packing services to be ~$100 million annually. Recently, PBP also inked a deal to acquire the assets and business of H&H Packaging (“H&H”). The acquisition is expected to be immediately EPS accretive from completion. Further, acquisitions of ABS and CPSA also deserve a special mention. The group remains focused on leveraging acquisition synergies and a high-quality customer base to drive the next phase of growth.
• Site Consolidation: The company is progressing well on the NSW site consolidation strategy and anticipates it materially accretive for shareholders in the medium term and provides earnings upside into FY22/23.
• Boosting Value to Shareholders: In 1HFY21, the company declared an interim dividend of 2.0 cents per ordinary share, which was paid on 19 March 2021. This represents a rise of 33% from 1HFY20.

The company remains on track to assess a range of accretive M&A opportunities, with an enhanced focus on bolt-ons that attracts new customers. In addition, PBP continues to focus on cost control measures, while investing higher and introducing new customer relationships to support its growth. The below picture depicts PBP’s growth momentum in Revenues and EBITDA since FY18.

Revenues & EBITDA Performance; Analysis by Kalkine Group

Key Findings from 1HFY21 Results:  

• During 1HFY21, the company reported total revenue of $42.6 million, down 3% year over year, owing to weakness in cough & cold sales.
• Underlying EBITDA for the period witnessed a growth of 20% on pcp and came in at $7.4 million.
• Underlying NPAT for the period stood at $3.69 million, indicating an increase of 44.2% year over year, reflecting an ongoing focus on operating efficiency and rebasing of cost structures in response to COVID-19.
• Underlying earnings per share increased 8% year over year and stood at 4.81 cents.
  

Balance Sheet & Liquidity Position:  PBP remains well-positioned for future growth and remains open to utilise its debt capacity to fund initiatives that are accretive for shareholders' returns.

• Increase in Cash Balance: The company exited 1HFY21 with a cash balance amounting to $17.71 million, up from $6.31 million reported at the end of 30 June 2020. The company’s total debt at the end of the period stood at ~$76.2 million. 
• Decent Cashflow from Operations: Operating cash inflow in 1HFY21 came in at ~$7.91 million, compared to cash inflow of $8.26 million reported in 1HFY20.

 Key Metrics: In 1HFY21, the gross margin of the company stood at 30.4%, slightly higher than the year-ago figure of 30.2%.  The current ratio for 1HFY21 stood at 4.67x, as compared to 1.76x in 1HFY20. Cash cycle days in 1HFY21 came in at 74.9, lower than the industry median cash cycle days of 152.9.

Profitability and Liquidity Profile; Analysis by Kalkine Group 

Key Update: On June 28, 2021, PBP informed the market that it has appointed Mr. Simon Gray, by unanimous resolution, as an independent non-executive director, effective from 1 July 2021.

Top 10 Shareholders: The top 10 shareholders together form around 48.6% of the total shareholdings, while the top 4 constitutes the maximum holding. Inston Pty Ltd. and Paradice Investment Management Pty. Ltd. are holding a maximum stake in the company at 9.32% and 7.39%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group  

Risk Analysis:  

• Leveraged Balance Sheet: The company has a debt-loaded balance sheet. As of 31 December 2020, total debt stood at ~$76.2 million (including financial leases), while cash and cash equivalents amounted to $17.71 million.
• Lockdowns & Global Uncertainties:  The latest lockdown in Victoria due to COVID-19 led uncertainties, may have a slight impact on the Group’s FY21 earnings.
• Stiff Competition:PBP operates in a highly competitive environment, which is subject to business consolidations, new strategic alliances, market pressures, and regulatory and legislative pressures.  
• Forex Headwinds:Any adverse movement in foreign exchange price may impact the financial performance of the company.

Outlook:

• The company remains on track to strengthen its foothold in the domestic as well as international market.
• The Pharmaceutical product categories, affected by COVID-19 are now expected to improve gradually through 1HFY22 and normalise through the 2H.
• The company expects demand for cold & flu-related products to recover in FY2022 fully. It also expects more than $10 million of recently secured revenue to be onboarded in the next 6-12 months.
• The company expects Pro-forma revenue for FY21 to be in the range of $159m - $163m, depicting a rise of ~50% from FY20.
• Pro-forma Underlying EBITDA for FY21 is expected to be in the range of $29.0 - $30.0m, indicating a growth of ~75% on FY20. Pro-forma Underlying EPS for FY21 is expected to be in the range of 16.0 – 17.0 cents per share, suggesting growth of ~49% on FY20.
  

Valuation Methodology: EV/Sales 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 price of the company has been corrected by ~10.5% in the past six months. Currently, the stock has a 52-week high and low level of $2.5 and $1.665, respectively. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company might trade at a slight premium compared to its peer average, considering recent developments, expected acquisition synergies, cost-cutting initiatives and enhancing shareholder’s value, etc. For that purpose, we have considered peers such as EBOS Group Ltd (ASX: EBO), Mayne Pharma Group Ltd (ASX: MYX) and Ansell Ltd (ASX: ANN). Considering site consolidation activities, boosting value to shareholders, decent long-term outlook, buyout synergies, robust 1HFY21 bottom-line performance, and valuation, we recommend a “Speculative Buy” rating on the stock at the current market price of $2.03 (as on 28 July 2021, 11:45 AM (GMT+10), Sydney, Eastern Australia).

PBP Daily Technical Chart, Data Source: REFINITIV 

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.

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.

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