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Pharma stock looks attractive after latest acquisition

Emma Rapaport  |  30 Jul 2018Text size  Decrease  Increase  |  
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Australian Pharmaceutical Industries (ASX: API) remains a buying opportunity for value investors following its $127 million acquisition of cosmetic skin and laser hair removal company Clearskincare Clinics, according to Morningstar. 

In a note published Friday, healthcare equity analyst Chris Kallos described the acquisition as "sound" given the similar demographic segment of women aged between 18 and 50 years being targeted by the company's retail brand (Priceline) in the health and beauty space.

He sees API's expansion into specialist skin care as a good opportunity for growth and diversification over the long-term, given the scale benefits of its pharmaceutical wholesaling and distribution business.

The deal was not significant enough to shift Morningstar's $1.95 fair value estimate, but Kallos says it helps reassert his long-held belief that the market undervalues the company, partly because of fears of the future impact of Amazon on the retail pharmacy sector.

"API shares remain significantly undervalued and reflect, in our opinion, the market's overly pessimistic outlook given the perceived threat of Amazon's online business to health and beauty category sales in traditional retail setting."

API is currently trading at a 16 per cent discount to Morningstar's $1.95 fair value estimate, closing Friday at $1.675 per share.

API's $127 million acquisition valued Clearskincare Clinics at 8.9 times its earnings multiple, based on forecast earnings of $14 million for fiscal 2019, as guided by management. Kallos believes this is in line with similar deals in the healthcare sector, which typically range between 7- and 9-times earnings.

The company currently operates 42 laser hair removal, assorted skin treatments, and cosmetic injectable clinics in high-traffic metro locations in Australia, and two clinics in New Zealand, running at a 30 per cent earnings margin.

cosmetic skincare

Clearskincare provides assorted skin treatments and cosmetic injectable clinics

Kallos expects the brand to grow via franchising, with a base-case of two clinics added per year. This, he says, broadly mirrors the growth trajectory achieved by the company since 2005.

On API, Kallos says the wholesaler continues to benefit from its vertically integrated business model, with the growth of the Priceline Pharmacy franchise revitalising the earning's profile.

"Growth of API's Priceline Pharmacy franchise business in the competitive health and beauty category is encouraging, given the improved earnings profile over the past two years, which suggests that scale benefits from the now 466-strong combined network are beginning to emerge," he says.

Other brands in the API network include pharmacy banners Soul Pattinson Chemist, Pharmacist Advice, and Club Premium, and consumer brands Health Basics and Only Good.

Kallos's narrow moat rating for API remains unchanged due to the company's high exposure to Pharmaceutical Benefits Scheme-derived revenue. Morningstar has increased its three-year earnings forecast, compounded annually, to 1.9 per cent from 1.4 per cent.

 

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Emma Rapaport is a reporter for Morningstar Australia

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is a reporter for Morningstar.com.au

© 2019 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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