A fair price to pay Defying downturn
But expect more squeals about Madison/Redefine ApexHi merger But who can we back in the future?
THE NOT SO INVISIBLE ELEPHANT in the room at Madison’s recent results briefing was the proposed merger with Redefine and ApexHi. I suspect both supporters and opponents of the deal came away with their initial views reinforced – though there was a broad acceptance it will go through, as it’s unlikely to have been put forward without assurance of sufficient unit-holder support.
Whatever the benefits to other parties, it looks a great deal for Madison. As executive director Wolf Cesman conceded – perhaps more revealingly than he knew – Madison has no assets other than its intellectual capital, which can’t be valued. And it’s well known some investors are unhappy with the quantum of its management fees from ApexHi, Hyprop and Redefine. The Hyprop contract expires at year-end 2009, Redefine in August 2010 and ApexHi at year-end 2012.
Defending Madison's stewardship, Cesman argued Hyprop has flourished, its investment in Canal Walk (Cape Town) alone having appreciated from R1bn to R4bn. Investors may be more interested in unit price performance, which is less impressive, but even so it’s increased from around 1 500c to 4 000c over the past five years.
At best, though, the management contracts would be renewed on terms less favourable to Madison; at worst, they might be cancelled. The merger will ensure the renewal of the contracts, which will now be in-house, so the costs will disappear on consolidation.
Of course, it’s a slight exaggeration to say Madison has no assets: it holds investments in ApexHi and Redefine worth R41m. It claims a net asset value of 136c, which is about 20% of its current unit price of 630c, which has provided little capital growth since it was listed three years ago. So the merger will give Madison investors (especially Cesman and his partner, Marc Wainer) a proper asset base and more assured longterm income flow.
That seems a fair price to pay for the assumed cut in equivalent distribution by a post-merger Madison to 68c from the 90c a stand-alone Madison may pay. The transaction will have only a minor effect on investors in ApexHi A and B units. The other big loser is ApexHi C units and the winner investors in Redefine.
The latter will go up from 68c to 75c; the former down from 85c to 78c. So it does seem that, confirming the complaints by Alan McConochie I discussed last week, it’s the ApexHi C unitholders who come out worst. The argued justification for that is their holdings are the most risky and highly geared. Well, that may be true. But the justification for that, in turn, was that those units carried the highest short-term growth prospects. The proposed deal seems to have lost sight of that; and the extra risk those units carry is debatable in any event. So there could well be further squeals of complaint from that quarter. (See story on p.30.)
LIKE SOME OF the supermarket groups and private hospitals, pharmaceutical shares are seen as safe defensive stocks in troubled markets. That’s been true in South Africa. But what are the prospects for such shares in the future? Much depends on the markets the companies focus on and – with pressure on consumer spending – generic medicines seems the place to be.
People will always buy necessary medicines, but in the current economic climate if they can buy down they will. That’s even evident with some medical doctors. If possible, they offer patients a generic alternative if there’s one available and the doctor believes it can do the job as well as the propriety drug.
Aspen Pharmacare is the big gorilla in the generics market, reportedly the largest manufacturer of such medicines in the Southern hemisphere. It recently put out a very upbeat trading update on interim results, due for release on 5 March. Earnings per share were forecast to be 45% to 60% higher, headline earnings per share by 65% to 80%.
As a defensive stock Aspen has been more than resilient. Its share price has gained close to 50% over the past year, more than 6% of that coming since its trading update was released. But that’s reflected in the share’s rating, an eye-watering earnings multiple of almost 20 times.
What are the other options? Adcock Ingram includes generics in its portfolio, but the focus is more on branded products and hospital products. It has some strong over-the-counter brands, including Panado, Myprodol and Synap Forte.
However, the Adco generics are important and CE Jonathan Louw says with its last results generics were showing volume growth. However, looking forward he says the strategy is to grow Adcock into a leading, world-class branded healthcare company. One attraction for investors is Adcock’s strong balance sheet, virtually un-geared and with cash close to R400m. The group has ambitious spending plans, earmarking more than R1bn to upgrade its plants and for possible acquisitions.
Says Louw: “Adcock’s
business strategy is based on leveraging its industry leading footprint in branded prescription products and over-thecounter and hospital products, thus ensuring a loyal customer base of doctors, pharmacists and retailers.”
That’s a solid client base. However, Adcock might find a larger exposure to generics more useful in the year ahead. But maiden results since unbundling from Tiger Brands and listing separately on the JSE last August were sound. Share price performance has also been good in the current volatile market but, like Aspen, that’s reflected in an earnings multiple of more than 20 times.
That leaves Cipla Medpro (formerly Enaleni), the small cap among the listed pharmaceutical groups. It’s spent close to R200m upgrading its plant in Durban, where it makes some of its own products and does contract manufacturing for other companies. But Cipla’s focus is far less on generics and much more on chronic medicines. It’s a good niche market; but there are some generic alternatives available.
At least Cipla’s share is on a more comfortable 11 times earnings multiple. Share price performance over the past year – up almost 2% – is not bad but nowhere near as good as Aspen and Adcock. At best it’s probably more of a speculative than defensive share.
Cipla’s annual results are due on 19 March. CE Jerome Smith wasn’t available for comment, but an update on operations should be made with its results.
Asked about the importance of the generics market, Aspen CE Stephen Saad says quality of manufacturer is a key driver of perceptions. “The future in almost all health markets is dependent on procuring quality, affordable healthcare. In developed economies ageing populations are straining healthcare systems. In emerging markets increasing affluence and population growth means more people procuring medicines and demanding affordable alternatives without compromising quality. In short, the generic industry has sales growth. We’re focused here and will remain focused here.”
But Saad does point out much of the growth reflected in the trading update has been driven by international expansion. Some analysts seem a bit wary of Aspen’s strong share price performance, and one consensus view is that it’s a sell. We don’t think so.
staffing industry. It’s the result of what Wilson calls “unscrupulous players”.
“The staffing industry is a significant facilitator of work in SA, assigning around 400 000 to 500 000 jobs every year. It’s also one of the largest contributors to skills development in this country.”
If there’s going to be regulation of the industry Pike says it will be aimed at what he calls the “bakkie brigade”. It’s aligned to certain industries, such as building and construction, where staff are placed with meagre pay and little benefits. There are also the small labour brokers, often specialising in providing staff when there’s a strike. “In principle, we welcome regulation that would target those people exploiting workers.”
Wilson says the first quarter of Kelly’s financial year will prove the softest, but says there will be a gradual improvement from this month and expects a better second half.
Pike also says it will be a tough year. “But however gloomy and bleak the economic picture becomes we believe we’ll outperform economic growth.”
Share prices have been hammered, perhaps to the extent where investors could consider good recoveries in employment agency counters.
Wants a world class branded healthcare company. Jonathan Louw People demand affordable alternatives without compromising quality. Stephen Saad
Misunderstood industry. Richard Pike