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Seed Weekly - Aspen ? Healthy and Growing

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Seed Investments – Financial manager (CT)
Seed Analytics – Operations manager (CT)

Seed Weekly - Aspen – Healthy and Growing

Aspen Holdings has been one of the darlings of the JSE over the past five years, with phenomenal momentum taking the share price to new highs every year. Judging by the group’s latest interim results, the ride is by no means over yet.

Aspen supplies branded and generic pharmaceuticals in more than 150 countries across the world, and operates 23 manufacturing plants on 6 continents. It is a true heavyweight on the JSE, being the largest locally listed pharmaceutical company, Africa’s largest pharmaceutical manufacturer, and the ninth largest generic medicine provider in the world as of June 2013. Aspen further benefits from a strategic partnership with the global pharmaceutical giant GlaxoSmithKline, from which it acquired four branded products in 2008 in order to enter the global market.

Latest Financial Results

Aspen recently released its interim results for the six months ended 31 December 2013, and it was clear that its non-SA operations were the primary drivers behind a promising 6 months. Revenue increased by 33% to R 12bn, operating profit rose by 16% to R 2.9bn and normalised headline earnings per share jumped 23% to 467 cents compared to the previous reporting period. Cash generated from operations amounted to R 2.2bn, which is a 9% increase on a gross basis, but reduces to an 11% decrease after finance costs and tax.

The graphs above provide a breakdown of Aspen’s gross revenue and earnings by region. The proportion of revenue and earnings derived from outside SA has increased remarkably since 2011 due to Aspen’s aggressive offshore expansion strategy.

The group’s EBITA (Earnings before interest, tax and amortisation) margin has been at 27% consistently over the past 3 years, but this figure has dropped to 25% for this reporting period. Currency depreciation has caused Aspen’s SA and Asian Pacific operations to struggle, but this was partly offset by the good performance of the other international regions. The group’s margin in SA is under severe pressure due to price regulation, and the company has not been able to respond with increased volumes or enhanced productivity.

MAT = Moving Average Total

Aspen has a 16.5% value share of SA’s private pharmaceutical market, and specifically a 31% share of the fast-growing generic sector. Aspen’s market position in SA is illustrated in the graph below, and with these comparisons it is not often that the heaviest balloon also flies the highest!

Despite being the largest company by market capitalisation (size of balloon) and already having the largest value share (x-axis), Aspen was still able to outgrow its competitors.

Current Valuation and Prospects

Aspen’s share price has enjoyed a strong run over the past 12 months, with an increase of 48% compared to the ALSI’s 16% excluding dividends. The share trades at a PE of 33, which is nearly twice that of the market’s 16.8. Although strongly cash-generative, Aspen has not historically paid high dividends, and the DY of 0.6% is only a fraction of the ALSI’s 3.2%.

The global healthcare sector has had very strong defensive and non-cyclical attributes historically, and an ageing global population is expected to provide a welcome tailwind going forward. Aspen’s global exposure positions it well to take full advantage of this going forward, and provides a useful rand hedge to SA-based investors.

Aspen is held in the Seed Equity Fund at a weight of 5.0%, and is one of the top holdings of the momentum strategy.

Kind regards,

Cor van Deventer

Source: www.aspenpharma.com

www.seedinvestments.co.za
info@seedinvestments.co.za
021 914 4966

Wed, 26 Mar 2014

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