- Objective of the Analysis
The objective of the financial analysis is to identify sound entities for long-term investment purposes.
For the purposes of this analysis I will have a look at the following:
- An overview of the operations
- Management
- Strategic drivers and key success factors
- Outlook
- Financial information
- Background
Adcock is engaged in the Pharmaceutical business.
The OTC division focus on pains, colds and related activities, while the Prescription division focusses on private market segment.
The is also a Consumer and a Hospital division. The Rest of Africa operates in Zimbabwe and Kenya.
From the above it is clear that Adcock is very much a Rand focussed business, while a decline in the currency might affect the business adversely.
- Management
The board of directors do represent the demographics of South Africa to a certain degree.
- Strategic Drivers
The strategic focus areas will be to
- Build on the foundation
- Growth and expanstion
- Transformation
- Customer service
- Cost control
- Extracting manufacturing efficiencies
- Investment in sales and marketing of brands, the enlarge the market share
- Regulatory compliance
- Culture of responsibility, accountability and fun at work
- Acquisitions
- Partnerships
- Innovation
- New customers and new sales channels
- Transformation
- Employment equity
- Preferred procurement
- Supplier development
- Risks
5.1. Management
Management identified the following areas as risks:
- Information technology
- Market share
- Foreign exchange
- Supply and cost pressure
- Cost-push vs cost pressure
- Human capital
- Labour environment
- Occupational health and safety
- Customers, suppliers and partners relationships
- SEP exemptions
- Regulatory environment
- Upgrading of the IT infrastructure
- Interruptions by utility providers
- Product portfolio
- Plant mechanisation
5.2. Key Audit Matters
The external auditors listed the following key audit matters:
- valuation of intangible assets
5.3. General
BEE and related costs
Poor economic outlook for Southern Africa
Costs to maintain BEE status
Geopolitical, permits and licences to operation
Laws and enforcement
Cyber
Climate change
Community relations and human rights
Taxes in various jurisdictions
Risk of poor investment decisions
Loss of missed opportunities
Adverse market changes
Imposition of adverse compliance regulations
Commercial objectives not attained
Unforeseen liabilities arising from changes in the portfolio
Sales revenue and operational performance not meeting expectations
Anticipated synergies and cost savings not been achieved or delayed
Inability to retain key staff
Unforeseen catastrophes
Cost pressures and reduction in productivity
Reputable risks resulting van joint ventures
Disclosure of contingent liabilities associated with various claims
- Outlook
The outlook for the Adcock is tough in view of the high unemployment rate, low growth in the economy and the weakening of the Rand. However, it is confident that with the broad range of products, that it will maintain its position, if not increase activities somewhat in future.
- Analysis of financial information
- Segmental information
The main segments are the following
- OTC
- Prescriptions
- Hospital
- Consumer
- Other
- Rest of Africa
- R & D India
The Prescription division contributes the most to sales with 34,2% (2017 – 32,6%), while the OTC profit margin of 20,1% (2017 – 18,5%) is the highest. The Consumer division rendering the biggest return of assets of 35.6% (2017 – 31,0%).
The growth in sales of the Prescription division of 15,5% is noteworthy.
- Liquidity ratios
The liquidity ratios are very sound and stable as in the past.
- Leverage ratios
The debt levels are very sound, while the interest cover is also sound.
- Activity ratios
Both the stock turnover and days to collect debtors can be improved.
- Profitability ratios
The Gross Profit Margin of 39,1% (2017 – 37,6%) and the Net Profit Margin of 13,6% (2017 – 12,2%) are very.
- Cash flow
The operating cash flow in relation to total liabilities amounts to 16,3% (2017 – 22,0%), a sound situation to be in.
- Growth
The growth in sales amounted to 10,24% and the operating expenses 12,0%. Profit before tax is up with 23.5%, while cash flow from operates is down from R455 433m to R382 926m.
- JSE Statistics
During the last six months the share price decreased with 2%, the last year declined by 14%, the last 3 years increased by 43%, while it increased with 4% over the last 5 years.
The consensus forecast amongst the financial analysists is a “Hold”.
The EPS is 412c, the P/E ratio is 15, the forward P/E is 14 and the dividend yield is 3%.
- Conclusion
This is a typical South African Inc entity. The balance sheet is well maintained and most of the ratios are satisfactory.
As a market leader, the margins are sound, while the growth rate is very good in view of a sluggish South African Economy. It is reasonably priced at a P/E of 15.
Most economists are positive for the South African economy and expect some growth to take place later in 2019 and or 2020. The effect of the Indian component is uncertain at this stage.
Adcock can be added to the investment portfolio of the long-term investor.
Anton Ferreira
29 March 2019