Australian Pharmaceutical Industries Limited

API Details

Australian Pharmaceutical Industries Limited (ASX: API) is engaged in distributing medical, pharmaceutical, beauty, health, and lifestyle products and retail services to pharmacies in Australia and New Zealand.

API announces Takeover Bid by WES:

• On 12 July 2021, API announced that Wesfarmers Limited (ASX: WES), has offered an indicative takeover proposal.
• API revealed that WES has made an “unsolicited, non-binding, conditional indicative proposal” to acquire all of its shares at AUD1.38 cash per share, representing a 20.5% premium to API’s closing share price as of 9 July 2021.
• The indicative proposal price would be lowered by the value of any dividends or capital returns declared, paid, or proposed after 9 July 2021.
• Notably, WES has entered into a deal with API’s shareholder, wherein its major shareholder Washington H. Soul Pattinson and Company Limited (which owns 19.3% of API’s share outstanding) has voted in approval of the Proposal.

Rationale Behind the Indicative Proposal

• The buyout would fortify WES’ presence in the Australian and New Zealand market, and lead synergies and cost savings along with an attractive opportunity to enter the expanding health, wellbeing, and beauty sector.
• API’s portfolio of pharmacy distribution, health and beauty retail and, skincare businesses offer attractive opportunities. If fruitful, the acquisition will enable API to form the basis of a new healthcare division of WES.

Other Major Aspects of the Proposal

Due to COVID-19 led uncertainties, API has experienced store and clinic closures, which had a massive impact on the company’s financial and operational performance. The Proposal is subject to the completion of positive due diligence, acquiring ACCC clearance, approval of API Board and shareholders. Markedly, given the current uncertainties led by the COVID-19 outbreak, API’s shareholders did not take any action concerning the Indicative Proposal and there is no guarantee that the Indicative Proposal will result in a transaction.

Key Findings from 1HFY21 Results

• Decline in Revenues: The company reported revenue of $2 billion, down by 2.6% YoY, due to the impact of the pandemic restrictions spanning Australia and New Zealand.
• Rise in Revenues from Clear Skincare Network: In 1HFY21, the company recorded pent-up demand from this segment, with revenues up ~11% on pcp.
• Cash Details: API held a cash and cash equivalents balance of $55.27 million as of 28 February 2021.

Underlying NPAT Highlights; Analysis buy Kalkine Group

Key Risks: The company faces the risk of growth of its network of pharmacies, increase in production and sales volume, uncertainty due to COVID-19 resurgence, and global supply chain disruptions.  Further, state-imposed short-term lockdowns, and the close of Clear Skincare clinics still prevail.

Outlook: API will continue to make digital investments in Priceline Pharmacy and Clear Skincare divisions. It is advancing with the construction of the NSW distribution centre on time and within budget.

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

*% 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 API gave a positive return of ~33.65% in the past nine months and a positive return of 22.87% in the last one year. The stock is trading close to its 52-week high of $1.38. We have valued the stock using the Enterprise Value to EBITDA multiple-based illustrative valuation and have arrived at a correction of high-single-digit (in % terms). For the purpose, we have taken peers such as Regis Healthcare Ltd (ASX: REG), Paragon Care Ltd (ASX: PGC), to name a few. On technical analysis front, the stock of API has a support level of ~$1.02 and a resistance level of ~$1.35. Considering the current trading levels, steep price movement in the past months, proposed takeover by WES, valuation, and 1HFY21 financial performance of the company, we suggest investors to book profit on the stock and give a ‘Sell’ rating on the stock at the current market price of $1.37, up by ~19.65% on 12 July 2021, post the company announced that WES, has offered an indicative takeover proposal.

API 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.

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