Australian Pharmaceutical Industries Limited

API Details

Improvement in CODB: Australian Pharmaceutical Industries Limited (ASX: API) is a wholesale distributor of pharmaceutical and allied products and retail support services to pharmacists. The market capitalisation of the company stood at ~$524.67 million as on 23^rd October 2020. For the year ended 31^st August 2020, the company recorded a growth of 0.2% in total revenue to $4.0 billion despite the retail lockdowns in its Priceline and Clear Skincare businesses. The company reported underlying EBIT of $56.3 million in FY20, reflecting a fall of 40.1% over the previous year. As a result of the impact of COVID-19 on its retail businesses, the company witnessed a decline of 42.6% in underlying NPAT to $32.5 million. During FY20, the cost of doing business (CODB) has reduced by 70 basis points to 10.2%, driven by ongoing cost reduction program of the company.

Key Financials (Source: Company Reports)

Outlook: The company seems to be well-positioned for driving growth in FY21 and beyond. With respect to Priceline Pharmacy, API expects to see substantial network expansion in the upcoming year.

Stock Recommendation: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

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

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: For FY20, the company declared a fully franked final dividend of 2.0 cps, reflecting a payout ratio of 33% of Underlying NPAT. API is in a decent position for growth with a lower cost base and robust balance sheet. The stock is currently inclined towards its 52-weeks low price of 0.995, offering a decent opportunity for accumulation. On a technical analysis front, the stock of API has a support level of ~$1.004 and a resistance level of ~$1.145. We have valued the stock using EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of lower double-digit upside (in percentage terms). For the purpose, we have taken peers like Mayne Pharma Group Ltd (ASX: MYX), Virtus Health Ltd (ASX: VRT), Sigma Healthcare Ltd (ASX: SIG), to name few. Thus, in light of the improved CODB, robust balance sheet, current trading levels, and valuation, we give a “Speculative Buy” recommendation on the stock at the current market price of $1.065 per share on 23^rd October 2020.

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

Paragon Care Limited

PGC Details

Improvement in Cash Flow: Paragon Care Limited (ASX: PGC) provides end to end healthcare solutions, which include equipment and service solutions for acute, aged and primary care. The market capitalisation of the company stood at $65.88 Mn as on 23^rd October 2020. For the year ended 30^th June 2020, PGC recorded revenue of $231.7 million, reflecting a fall of 2% over FY19. This was impacted by the temporary closure of hospital elective surgery due to COVID-19. Normalised EBITDA for the year amounted to $22.9 million against $28.3 million in FY19. PGC posted net loss after tax of $77 million, which was impacted by the impairment of goodwill and write-offs. After the restructuring of collections process, the company’s trade debtor improved to $31.6 million in FY20 from $44.1 million in FY19. This also led to an improvement of $10 million in cash flow.

EBITDA (Source: Company Reports)

What to Expects: PGC is rapidly accelerating its market stake in $9 billion industry, which is supported by its strong tailwinds. For FY21 and beyond, the company will maintain its focus on finalization of op-ex cost reduction and targeting a revenue growth of over 5% in 4 pillars (Devices, Diagnostic, Capital & Consumables, and Service & Technology). PGC is scheduled to conduct its Annual Shareholders Meeting on 18^th November 2020.

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The company closed FY20 with cash and cash equivalents of $24.5 million. The stock of PGC is trading towards its 52-week low level of $0.095, offering decent opportunity for accumulation. On the technical analysis front, the stock price of PGC has a support level of ~$0.120 and a resistance level of ~$0.225. We have valued the stock using the P/CF multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). For the purpose, we have taken peers like Compumedics Ltd (ASX: CMP), Mayne Pharma Group Ltd (ASX: MYX), Regis Healthcare Ltd (ASX: REG), to name few. Hence, considering the improvement in debtor collection, future focus areas, rising market share and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.195 per share on 23^rd October 2020.

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

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