Low earnings growth a bitter pill for Aspen
Balance sheet issues cloud market’s near-term view, which puts pressure on share price, says portfolio manager
JSE-LISTED Aspen Pharmacare’s share price shed more than 29 percent on the bourse on the back of low earnings growth reported in the six-month period to end December.
The global multinational speciality pharmaceutical company released its results after the close of markets on Thursday, and as the market digested the results, the share price dived to R70 a share on Friday morning, down from Thursday’s closing price of R141.15.
However, the stock recovered in the afternoon to trade at around R99.91 and closed the day at R100.66.
Nishlen Govender, a portfolio manager at Citadel, said Aspen’s share price had been trending downwards for some time now and saw a massive share price depreciation in 2018 as the stock fell 50 percent.
“The reason was the fact that Aspen was moving further away from their generic pharmaceutical business into a specialised provider across key products. This strategy entailed buying drugs from global manufactures, which is effectively an acquisitive growth strategy.
“The issue with this is trying to develop organic growth to allow the company to harness returns, which justified the multiples paid for them. One could argue that Aspen was too aggressive in their acquisition approach and thus levered their balance sheet significantly.
“This has been a key issue for the market as the company faces debt covenants, as it expects its net debt to earnings before interest, tax, depreciation and amortisation (Ebitda) to increase to 4.4x. The business does expect this to reduce to less than 3x in time as capital expenditures reduce.”
Govender said the key issue currently was the fact that the sale of an infant formula business had been delayed to May, which was due to be sold to Lactalis, a French company.
“The cash from this sale is crucial as it will provide €635 million (R10.28 billion) of funding that will be used to retire debt,” Govender said.
Aspen deputy chief executive Gus Attridge admitted that the group had high debt levels.
“We are quite aware of the debt and we are working hard on reducing it. We have spent significantly in the past by expanding the business on new investments. However, the expected sale of the Nutritionals business is nearing completion, which will enable us to put all our focus on pharmaceuticals. We are going to use the proceeds of that sale of around R10bn to reduce debt,” Attridge said.
However, Govender said in the interim other operations must step in to fund debt on the balance sheet, but this had been slow with supply constraints in key areas such as anaesthetics, while the manufacturing business was down 10 percent.
“These places further pressure on the balance sheet, which may require equity funding if covenants are breached. The balance sheet issues are significantly hampering the markets near term view hence the share price pressure. The market has taken the delay of the infant formula sale particularly badly.”