AFT Pharmaceuticals Limited

Company Overview: AFT Pharmaceuticals Limited (ASX:AFP) is a multinational pharmaceutical company with a wide range of products, including both proprietary and in-licensed products from third parties. The company’s products consist of key pharmaceutical distribution channels such as over the counter, prescription, and hospital. The company operates in Australia, New Zealand, and South-East Asia.

AFP Details

International Expansions & Licensing Deals Aids AFP: AFT Pharmaceuticals Limited (ASX: AFP) is engaged in the developing, and marketing a wide range of product portfolio, which includes both proprietary and in-licensed products along with branded, patented, and generic drugs. The company started 2020 with a positive note despite the challenges and disruptions caused by COVID-19 pandemic. During the period, the company witnessed a record level of $100 million sales and delivered record earnings, owing to continuous momentum across its key business operations. Especially, the company’s Australasian business performed well expanding a two-decade record of growth. In the international market, the company’s core Maxigesic pain relief medicine persisted to accomplish key commercialisation achievements, with sales beginning in eight new countries in the past year. Further, new dosage forms of the medicine such as Maxigesic IV, are also providing a strong growth pipeline of opportunities for future goals.

Recently, the company entered into a licensing deal with Lyon, France-based Aguettant to distribute Maxigesic® IV in eight new European markets. The agreement expands Maxigesic IV’s foothold across Europe and substantially grows the market for the medicine. Notably, the company remains on track to witness continues future growth opportunities in operating earnings and cashflow, given these combined developments. 

In FY20, AFP witnessed an increase of 24% year over year growth in its top-line, with revenue growing sharply in Australia (up 22% year over year), New Zealand (up 12% on pcp) and Southeast Asia (up 130% on pcp). The international business, which is centered mainly on the commercialisation of Maxigesic witnessed a growth of 55%. During the period, operating profit came in at NZ$21.2 million, up from NZ$6.1 million reported in the year-ago period. Looking at the past performance, the company derived maximum revenues from the Australian region, benefiting from growth in the three sales channels, over the counter, hospital, and prescription. Also, the company saw a continuous upward trend in its operating revenues starting from 2005 to 2020.

Revenue Trend by Region (Source: Company Reports)

Key Trends (Source: Company Reports)

1HFY21 Key Financial Highlights: During the half, the company’s total revenues rose by 4% year over year and came in at NZ$48.8 million. Product sales rose 9% year over year to NZ$48.4 million. The increase in revenues depicts the company’s portfolio strength with a substantial growth across business segments and increase in number of countries, where Maxigesic were sold (up 21% year over year). During the period, the company witnessed an increase in normalised net profit after tax of 968% year over year, which came in at NZ$1.2 million. During the period, the company witnessed continuous market share gains across Australia and New Zealand. Underlying operating profit for the period stood at NA$2.4 million.

During the period, the company witnessed a growth of 11.1% year over year from Australian region, which came in at NZ$28.5 million. The increase was aided by higher revenues from over the counter, hospital, and prescription. Revenues from New Zealand business increased by 0.1%, owing to growth in the OTC channel and a small boost from the prescription channel.

1HFY21 Key Highlights (Source: Company Reports) 

Key Update:  On 17 March 2021, AFP informed the market that it has entered into an agreement with Desitin Arzneimittel GmbH, for the commercialisation and advancement for its orphan drug Pascomer®, in 27 countries within the European Union along with the United Kingdom, Norway, and Switzerland. The deal with Desitin, will provide AFP with substantial coverage and expertise in the therapeutic area across Europe. 

Top 10 Shareholders: The top 10 shareholders together form around 75.77% of the total shareholdings, while the top 4 constitutes the maximum holding. Atkinson (Hartley Campbell) is the entity holding maximum shares in the company at 69.46%. Norges Bank Investment Management (NBIM) is the second-largest shareholder, with a holding of 2.13%, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Chart Created by Kalkine Group 

Key Metrics: At the end of 30 September 2020, the company’s cash balance stood at NZ$5.97 million, with total debt amounting to ~NZ$44.19 million (long term debt stood at NZ$34.7 million, while short term debt came in at NZ$3.45 million). Shareholder’s equity stood at NZ$29.9 million, up 73% year over year. Operating cash outflow for period came in at NZ$2.7 million.  In 1HFY21, current ratio of the company stood at 2.26x, higher than the industry median of 1.58x. The company reported debt to equity ratio of 1.48x, as compared with 1HFY20 figure of 3.82x.

Profitability and Leverage Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group  

Key Risks: A highly leveraged balance sheet might weigh on the company’s financial performance, going forward. As of September 30, 2020, the company’s cash and cash equivalents were NZ$5.97 million, while total debt was NZ$44.19 million. Additionally, competition from peers, and the global threat environment remains add to the woes. Further, lower investment in generating working capital requirement exposes the company to liquidity risk. The company’s current revenues were based on the performance of the partnering companies and may not be sustainable. The company also increased its investment in R&D, to achieve its growth plan, which might weigh on margins, going forward.

Outlook: The company remains on track to strengthen its foothold for its flagship products in both global and local markets. Further, robust local sales growth and accelerating momentum in international markets remain potential tailwinds for the company. Further, continuous development and commercialisation of the Maxigesic range and other products such as NasoSURF and Pascomer, are expected to aid the financial performance, going forward. AFP is also taking necessary measures to complete licensing agreement discussions in China, Japan, LATAM and the USA. The company is targeting continuing positive cashflow and an operating profit between NZ$14–18m, depicting a rise of 23-58% over FY20.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Currently, the stock is trading slightly above the average of its 52-week’s high and low level of $5.25 and $3.43, respectively. The stock of the company went down by ~18.66% in the past three months. On a technical analysis front, the stock has a support level of ~$4.066 and a resistance level of ~$4.79. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company might trade at a slight discount as compared to its peer average, considering increased investment in R&D, challenging global environment, stringent regulatory requirements, lower margins versus industry median. For the purpose, we have taken the peer group - Mayne Pharma Group Ltd (ASX: MYX), Australian Pharmaceutical Industries Ltd (ASX: API), Probiotec Ltd (ASX: PBP), to name a few. Considering decent top-line performance, licensing agreement with cash management activities, decent long-term outlook, international expansion, robust product adoption and current trading levels, we recommend a “Buy” rating on the stock at the current market price of $4.40, up by ~6.28% as on 24 March 2021.

AFP Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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