Australian Pharmaceutical Industries Limited (ASX: API)

Strategic Partnership with Clearskincare Clinics- Australian Pharmaceutical Industries Limited (API) is one of Australia’s leading pharmaceutical distributors and fastest growing health and beauty retailers. The Group is the parent Company ofPriceline Pharmacy, Soul Pattinson Chemist and Pharmacist Advice. API services include wholesale product delivery, retail services, marketing programs and business advisory services. It operates with a vision of “Enriching Life as the most inspirational choice for health, beauty and wellbeing”.

With a market capitalisation of $667.24m and P/E multiple of 13.83x, the dividend yield of about 5.17% looks decent. Despite the challenges that it has faced lately, the group has delivered consistently increasing dividends over the last four years. The business is still robust, and fundamentals look healthy.


Acquisition Schedule (Source: Company Reports)

To look at business enhancement, the Company now entered a binding agreement to acquire the assets of Clearskincare Clinics for $127.4 million which will be paid in instalments over three years. Through this acquisition, API will acquire a 50.1 per cent of controlling interest in the clinic business and will take 100 per cent ownership of the skincare products business and will move to a 100 per cent ownership of the clinic business by September 2021. This purchaser price equates to an EBITDA multiple of approximately 7.6x over the course of the three years while the initial payment represents an EBITDA multiple of 8.9x on the FY19 forecast. The acquisition will be funded through a new medium term facility of $65 million and the balance of the transaction funding in 2020 and 2021 will be determined by the company at the time. This strategic acquisition will occur between 2018 and 2021, like in July 2018, API will pay $61.6 million and will receive the initial 50.1 per cent controlling share in the clinic operations and 100 per cent of the skincare product business. Further, in September 2020, API will pay $32.9 million and its stake will rise to 75.1 per cent. In September 2021, it will pay its last instalment of $32.9 million and finally will assume its full ownership of the clinic operations.


Trend of Clearskincare Clinics Revenue (Source: Company Reports)

It is expected that this acquisition will generate positive synergies and will be delivering positive EPS in FY19. It is expected that it will generate pro forma revenue and EBITDA of approximately $48 million and $14 million respectively in FY19 (before allocation to minority interests). This partnership with Clearskincare Clinics will give API an excellent opportunity to grow. API and Clearskincare Clinics share a similar clinical focus and are both experienced in operating with health professionals in regulated delivery environments. After slipping by 19.10 per cent in last six months, the stock price started recovering in last five days and was up by 1.50 per cent. Meanwhile, the stock price jumped up by 7.01 per cent as on 25 June 2018 as the Group announced its plans for the acquisition. We maintain our “Hold” recommendation at the current market price of $1.45 as its better to watch the impact from the acquisition while the group has a decent position given the population trends and healthcare demand.

 
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