SIMON BROWN: I’m chatting now with Kearabilwe Nonyana. He is manager of equities and derivatives at ThinkMarkets. Kea, I appreciate your early morning time. Aspen is a company that is in a markedly better shape, just from their balance sheet and debt. A couple of years ago they were almost in breach of debt covenants. In fact, they got some waivers as they had to sell assets to pay off the debt. But that balance sheet is looking a lot better and looking sustainable. Frankly, kudos to management for turning it around in a relatively quick time.
KEARABILWE NONYANA: They have really turned around the business operations in a relatively good time, but I do not believe that the business was a bad business when they would be in breach of the covenants. I think the strategy of acquiring, improve, and de-lever was just getting too onerous. And as well, the low cost of capital for the debt they raised made some projects seem viable when they probably weren’t.
SIMON BROWN: I take your point, Stephen Saad and his team did a great job. I heard him in an interview once and he said: “You know what? We never had to issue shares. All of this was we raised debt, we never issued shares, never diluted shareholders. And we ultimately paid it off.” It had been working – perhaps one or two mispriced – but it had been a strategy. I suppose the bankers then got involved and didn’t like their debt covenant breaches.
KEARABILWE NONYANA: Essentially that was the problem. I do not necessarily believe that the strategy itself was one that hadn’t worked, and management were just generally implementing a strategy which has worked before. I think the fault in the strategy was now starting to diversify outside of brands that they would have ordinarily made successful. Some of the brands that they were starting to go into were just not part of the whole business model, and I think that’s part of why that strategy started to fail in recent years.
SIMON BROWN: Looking forward now, the balance sheet is looking better, they’ve got rid of some of their businesses; they’ve obviously still got a bunch of branded and generic drugs. You make the point that as elective surgeries start to return, this is going to help revenues – during the pandemic, elective surgeries disappeared – and the vaccine is going to add even further annuity income in years ahead. They are well-positioned going forward.
KEARABILWE NONYANA: They have been highly operationally efficient over the interim, adding annuity income as an earnings driver, as well as elective surgeries. As you know, outside of Africa most global populations are starting to age and, if we are really looking at forecasts of the demand for the anaesthetic products, the thrombotics, as well the generic brands, we are starting to see quite an increase in that forecast. I think that gives them good opportunities for their earnings, as well as being involved in the J&J vaccine production, which is estimated to produce about 300 million doses per annum. That adds quite an interesting earnings mix for the future periods.
SIMON BROWN: The ageing population – it’s a global trend. People are living longer. Therefore they’re more often having cases of elective surgery in old age, as our bodies struggle with the extra years. That’s a huge trend and they are incredibly well-positioned for it. The healthcare sector generally is going to benefit from it. Aspen, because of some of the drugs they supply, is a play on people living longer.
KEARABILWE NONYANA: And essentially they appear in emerging markets. Yesterday Pfizer came out with results and we can only compare Aspen to its international peers. There is nothing local that I think is comparable here. Pfizer’s results are incredible and came out to market pre-market. And you are starting to see the demand for elective surgery, the demand for some of the expiring patents from Pfizer, which I also think gives Aspen an opportunity to enter into markets as patents start to expire.
SIMON BROWN: They’ve also got a very strong manufacturing base. They’ve got that plant down in Gqeberha which is doing the Johnson & Johnson Covid vaccines. They’re actually going to be expanding that as well, which is going to give them even more capacity and, I think, is one of the aces up their sleeve.
KEARABILWE NONYANA: That plant in Gqeberha really is just going to become part of the strategy of becoming more cost-efficient. As I said previously, I think Aspen is one of the most operationally efficient [companies] manufacturing pharmaceuticals in the world. And if they’re going to move a lot of the production in-house, it’s going to provide cost efficiencies as they raise production and bring costs per unit down, and it will feed through straight to the bottom line.
SIMON BROWN: Your price target on it? You’ve got the research. [One] can find it on the ThinkMarkets website. You’re looking at about R185, and it’s trading about R160 now. I think it was actually a little lower when that report initially came out. It had a huge run last week, and you’re certainly saying this is a stock that has some upside to it.
KEARABILWE NONYANA: Yes. On a quiet day of trade, I think it was Monday the 25th, [inaudible], it really did give … a price target, but I think there’s some institutional interest in the stock. I think we are at the top end of the price target range when I compare ourselves to our industry peers, but we really are a liker of Aspen first of all at a valuation level. I mean, it’s trading at about 10.33 forward price-earnings, and about a 10.36 EV to Ebitda, forward EV to Ebitda. When we look at historical times, it did one side about 30 times, and sometimes at about 20 times. At valuations alone, we find the stock very undervalued. On top of that, the key earnings drivers that we have identified for the investment really just make R185 seem, I think from my team, also a bit prudent.
SIMON BROWN: I agree with you. I think it’s one of the great stocks. And, as you point out, it’s got no competition on our market. Kea Nonyana is manager, equities and derivatives sales, at ThinkMarkets. I appreciate the early morning.
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