- 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
Aspen is a global supplier and manufacturer of speciality, branded and generic pharmaceuticals, with an extensive basket of products that provide treatment for a broad spectrum of acute and chronic conditions experienced through all stages of life. The Group continues to benefit the lives of patients using its products, reaching more than 150 countries.
- Management
The board of directors have an impressive array of qualifications and experience. To my humble opinion, management is still in the entrepreneurial phase and not necessarily acquainted with the demands of a major listed Group operating internationally.
- Strategic Drivers
The completion of the Nutritional disposal will affect management’s view on the European and Southern African operations with an effort to emphasize value delivery. This transaction is in the region of R6 560 m.
The emphasis will be on organic growth.
Certain woman’s health products are developed for launching in the USA.
- Risks
5.1. Management
The risks management identified are as follow:
Measurement of goodwill and indefinite life of intangibles
Uncertain tax positions
Accounting for the residual rights to AstraZeneca anaesthetics portfolio
5.2. Key Audit Matters
The external auditors identified the following matters:
Measurement of goodwill and indefinite life intangible assets
Uncertain tax positions
Accounting for the residual rights to AstraZeneca anaesthetics portfolio
5.3. General
The following should also be considered as risks:
High debt levels
Growth in expenditure levels
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
Cybersecurity risks
Cost pressures and reduction in productivity
Reputable risks resulting from quality issues
Safety and health risks
- Outlook
Certain brands are on the decline in Australia, Ecuador, Venezuela, Brazil
The outlook for certain products such as Kemadrin, Cofal and Valda have improved.
On the macro environment the following may be applicable:
US tax rates were cut and the outlook is positive, even taking the US-China trade problems into account.
With a population aging and major debt burdens, Japan will most likely stagnate.
Brexit does put a damper on the growth outlook of Europe.
India expects to growth with a positive influence on the Aspen Group.
My feeling is that a worldwide aging population will benefit Aspen.
- Analysis of financial information
- Segmental information
Aspen segments its business into Therapeutic Focussed Brands, Pharmaceuticals and Nutritional Products with Pharmaceuticals the major contributor to sales, while the gross margin for Therapeutic Focussed Brands is the highest.
The Therapeutic Focussed Brands also recorded the highest growth in sales.
It is a pity that segmental information per geographical region is not disclosed.
In general, the margins are sound.
- Liquidity ratios
The liquidity ratios are satisfactory, but is influenced by the fact that the Group carries strategic inventories.
- Leverage ratios
The debt levels are very high and the ability to service these debt levels from operating cash flows is under constraint. It seems as if management is also considering selling some of its brands to bring the debt levels (and intangible assets) under control.
- Activity ratios
The stock turnover and debtors’ collection periods are very long.
In relation to turnover, the Intangible assets and Goodwill is extremely high.
- Profitability ratios
The gross and net margins are very good.
The growth in sales is modest, while the growth in expenses are more that the growth in sales, not a good sign.
- Cash flow
The operating cash flow in relation to total liabilities amounts to 8,5% (2017 – 8,9%), a reason for concern.
- JSE Statistics
The share price declined by 62% for the last year, 68% over the last three years and 65% over the last five years.
The consensus forecast by the financial analysts is a Buy.
The earnings per share is 1 254c and the P/E ratio is 8.
The dividend yield is 3,1%.
- Conclusion
Aspen has always achieved very sound margins, is focused but operating globally. The liquidity is sound.
The growth in sales is low.
The debt levels are high, the ability to generate cash is reason for concern and the intangible assets pose a risk.
The increase in operating expenses is more than the increase in sales.
The sale of the business for over R6 560 m might relieve the debt levels and up the profits.
With this as background, the investors hit the share price extremely hard: It dropped substantially from R140 to R70, while it is at R97 now. If sanity kicks in, debt levels are reduced and management adopts a conservative financial approach the share price might climb to R120 assuming a 10 P/E and even to R181 assuming a P/E of 15. However, this is if one adopts a speculative approach.
Keeping my initial goals in mind, i will not rate this as a suitable share for my long-term portfolio, but will take a wait and see approach.
Anton Ferreira
16 March 2019