Financial Mail - Investors Monthly - - Contents - Nick Hed­ley

Aspen Phar­ma­care, Glen­core, Ned­bank, Wescoal, eMe­dia

Stein­hoff’s ac­count­ing scan­dal has in­flicted a fair amount of col­lat­eral dam­age on Aspen Phar­ma­care, the Dur­ban-based com­pany that’s built a global em­pire in the two decades since list­ing.

Still 16%-held by CEO Stephen Saad and his deputy, Gus At­tridge, Aspen makes its port­fo­lio of mostly spe­cial­ity prod­ucts on six con­ti­nents.

But its ag­gres­sive off­shore ac­qui­si­tion strat­egy and “very sub­jec­tive” ac­count­ing treat­ment of in­tan­gi­ble as­sets have brought un­wanted at­ten­tion from short sell­ers in re­cent months — keep­ing its shares on a los­ing streak.

The share is yet to re­cover from a fear-driven sell-off sparked by spec­u­la­tion that Aspen was the next tar­get — af­ter Stein­hoff — of Viceroy Re­search. It was trad­ing at R258.90 at the time of writ­ing — well be­low the highs of nearly R440 reached in 2015. But most an­a­lysts still rate it a “buy”, Bloomberg data shows.

Nat­u­rally, Aspen’s man­age­ment team is bullish. Head of strate­gic trade Stavros Ni­co­laou says the drug­maker “is prob­a­bly SA’s most glob­alised com­pany”, with sales to 150 coun­tries.

Ni­co­laou says Aspen has safe­guarded its fu­ture by shift­ing from generic drugs to spe­cialised ther­a­pies, which shield it from low-cost ri­vals as they are dif­fi­cult to make.

“There’s sig­nif­i­cant fo­cus in grow­ing these niche ar­eas in off­shore mar­kets, such as China,” he says.

The group is also not de­pen­dent on patent pro­tec­tion: it buys post-patent prod­ucts and ex­tracts value through sup­ply chain ef­fi­cien­cies and by tak­ing them to new mar­kets.

The group is look­ing to fo­cus mainly on emerg­ing mar­kets that have “pos­i­tive demo- graph­ics and low per-capita us­age and spend”.

Quin­ton Ivan, Corona­tion’s head of SA equity re­search, is among the op­ti­mists. He says the share’s de­cline be­lies Aspen’s strong fun­da­men­tals and “fan­tas­tic track record”.

But the “in­dis­crim­i­nate” sell­down means Aspen is at­trac­tively priced. At the time of writ­ing, its for­ward p:e was 15.2.

Ivan says new op­por­tu­ni­ties, in­clud­ing the in­fant nu­tri­tion busi­ness in China, are not re­flected in the share price. He also says Aspen’s ac­qui­si­tions have been “strate­gi­cally sound”.

How­ever, An­dré Bekker, an equity an­a­lyst at Arqaam Cap­i­tal, is scep­ti­cal. He says most of Aspen’s rev­enues have been bought — it’s made 52 ac­qui­si­tions and 16 dis­pos­als since list­ing — which means eco­nomic profit ero­sion has off­set any or­ganic growth.

In the four years to June 2017, Aspen’s rev­enues and earn­ings roughly dou­bled, but op­er­at­ing mar­gins and re­turn on cap­i­tal de­clined, Bloomberg data shows.

Arqaam es­ti­mates that about R5bn in syn­er­gies have been ex­tracted since list­ing, but this came at a cost of R24.9bn in cap­i­tal ex­pen­di­ture, as Aspen has had to in­vest in ad­di­tional prod­uct rights and man­u­fac­tur­ing fa­cil­i­ties.

Arqaam is un­happy with man­age­ment’s ac­count­ing poli­cies, par­tic­u­larly its treat­ment of nor­malised head­line EPS num­bers, which ex­clude charges that are “in­te­gral to its busi­ness model”, such as trans­ac­tion and re­struc­tur­ing costs.

Its treat­ment of in­tan­gi­bles is also “very sub­jec­tive”.

“Phar­ma­ceu­ti­cals re­main vul­ner­a­ble to com­pe­ti­tion, gener­ics and ob­so­les­cence. Aspen’s ac­count­ing treat­ment in­flates earn­ings … and fails to match the group’s rev­enue to its cost base.”

That could be be­hind Aspen’s “higher than jus­ti­fied” share rat­ing, Bekker says.

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