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H123 focused on portfolio expansion

AFT Pharmaceuticals 24 November 2022 Update
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AFT Pharmaceuticals

H123 focused on portfolio expansion

H123 update

Pharma and biotech

24 November 2022

Price

NZ$3.99

Market cap

NZ$419m

NZ$0.62/US$

Net debt (NZ$m) at 30 September 2022

28.9

Shares in issue

104.9m

Free float

26.8%

Code

AFT

Primary exchange

NZX

Secondary exchange

ASX

Share price performance

%

1m

3m

12m

Abs

6.7

15.3

(19.4)

Rel (local)

1.7

20.0

(7.0)

52-week high/low

NZ$4.95

NZ$3.1

Business description

AFT Pharmaceuticals is a specialty pharmaceutical company that operates primarily in Australasia but has product distribution agreements across the globe. The company’s product portfolio includes prescription and over-the-counter drugs to treat a range of conditions and a proprietary nebuliser.

Next events

FY23 results

May 2023

Analysts

Soo Romanoff

+44 (0)20 3077 5700

Jyoti Prakash

+91 (0)981 880 393

Nidhi Singh

+44 (0)20 3077 5700

AFT Pharmaceuticals is a research client of Edison Investment Research Limited

AFT reported strong post COVID-19 revenue momentum in H123 (NZ$65.8m, 18.4% y-o-y growth), driven by robust organic growth across all regions, supported by new product launches. Sales uptake was boosted by robust demand from both domestic (23.5% growth in Australia, 34.7% in New Zealand) and Asian markets (26.1% growth). However, profits were weighed down (operating margin of 5.3% vs 9.9% in H122) by the delay in the anticipated licensing income from Hikma (c US$6m) and materially higher SG&A expenses related to new product launches. AFT expects FY23 revenue growth to be skewed towards H223 due to additional product launches, although margin pressures may carry over, as evidenced by a downward revision in FY23 operating profit guidance to NZ$18–23m (previously NZ$27–32m). Incorporating these developments, our valuation falls from NZ$681m or NZ$6.50/share to NZ$665m or NZ$6.34/share.

Year end

Revenue
(NZ$m)

PBT*
(NZ$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

03/21

113.1

8.2

7.1

0.00

56.2

N/A

03/22

130.3

18.9

19.2

0.00

21.0

N/A

03/23e

152.2

17.6

13.4

2.57

30.0

0.6%

03/24e

189.7

31.3

21.7

4.22

18.4

1.1%

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Domestic markets continue to helm growth

H123 revenue growth was aided primarily by strong sales momentum from the domestic Australia and New Zealand markets, driven by new product launches. Australasian revenue stood at NZ$57.4m (87% of H123 sales), recording healthy sales growth of 27.4% y-o-y, while Asia also reported strong figures (up 26.1% yoy) driven by 115% growth in the over the counter (OTC) business following the distribution agreement with ASX-listed McPherson’s in November 2021. However, international sales were negatively affected (down 37.8%) by the lack of licensing income in H1, which weighed down group operating margins (5.3% vs 9.9% in H122). With additional product launches planned for H223, we expect increased sales momentum in H2 although margins are likely to remain under pressure due to higher SG&A expenses related to the new launches.

Focus on new product launches

AFT launched 11 products in H123 and plans to launch an additional 15 (14 OTC and one prescription product) in H223, supported by an incremental NZ$10m in sales and distribution expenses. Overall, AFT plans to launch around 76 products by FY25, which we expect should contribute materially to the top line in the medium term. Maxigesic, AFT’s core intellectual property (IP) product line, remains on target to be launched in 63 countries by end FY23 (51 countries currently).

Valuation: NZ$665.0m or NZ$6.34 per share

We have made adjustments to our forecasts based on the H123 performance and revised management guidance for FY23. Overall, our valuation decreases slightly to NZ$665.0m or NZ$6.34/share (from NZ$680.8m or NZ$6.50/share).

H123 results driven by robust domestic markets

AFT reported revenue of NZ$65.8m in H123, a solid 18.4% y-o-y growth over H122, primarily driven by strong organic growth across all regions and new product launches. However, benefits from the strong product sales across Australian, New Zealand and Asian markets were partially offset by lower licensing income, resulting from the delay in the anticipated licensing income from Hikma Pharmaceuticals (~US$6m). Domestic markets (Australia and New Zealand) accounted for 87% of total group revenue, while the remaining 13% was contributed by other Asian markets and international business.

H123 gross profit margin declined by over 4.5pp (to 43.6% from 48.1% in H122), attributed to the absence of licensing income, which comes with 100% margin. In addition, operating margins were affected by higher sales and marketing expenses (NZ$17.3m vs NZ$14.2m in H122) to support new product launches. Combined, these issues resulted in operating margin declining to 5.3% (down from 9.9% in H122).

Broad based growth across all geographic segments

Revenue from Australia, which accounted for 55% of H123 revenue, was up 23.5% y-o-y to NZ$36.1m. The OTC channel, which represents approximately 65% of revenue for Australia, grew 36.9% mainly due to sales normalising to pre COVID-19 levels as well as well as 11 new product launches. Maxigesic hot-drink sachets, in particular, performed strongly. The hospital and prescription channels, accounting for the remaining 35% of Australia revenue, recorded single-digit growth during the first half. With a further 15 products planned for launch in H223, management anticipates a comparatively stronger H222. Operating profit in the region declined to NZ$3.1m in H123 (NZ$3.6m in H122) due to higher selling and distribution expenses to support new product launches, however, operating margins rose to 14.6% in H123 from 12.4% in H122, benefiting from the company’s ability to pass on input price increases to end-customers.

New Zealand revenue was up 34.7% to NZ$21.3m in H123 due to strong growth across all distribution channels. The OTC channel (51.7% of New Zealand sales) grew 28.5% to NZ$11m, reflecting strong organic growth and improved traction from allergy and pain relief medicines. While the hospital channel grew 16.5%, the prescription channel grew 56.9%. Excluding head office costs, the region booked an operating profit of NZ$4.9m (up from NZ$2.0m in H122).

Asia (5.6% of H123 group revenue) increased by 26.1% to NZ$3.7m in H123, driven by 115% growth in the OTC business, supported by the distribution agreement with McPherson’s for the Singapore market and Maxigesic sales uptake in Malaysia and Hong Kong. As a reminder, AFT entered into a distribution agreement with McPherson’s in November 2021 to expand its OTC products reach to Singapore. The agreement was effective for a range of products including the tablet form of Maxigesic, premium Liposomal nutritional supplements and other pharmaceuticals. The hospital channel grew 44.1%. Operating profit slightly improved to NZ$0.5m in H123 (NZ$0.4m in H122).

Exhibit 1: H123 results by region

NZ$000

Revenue
H123

Revenue
H122

Operating profit before tax H123

Operating profit before tax H122

Australia

36,068

29,201

3,101

3,620

New Zealand

21,295

15,815

142

(1,807)*

Asia

3,664

2,905

532

416

Rest of world

4,723

7,592

(318)

3,262

Total

65,750

55,513

3,457

5,491

Source: AFT Pharmaceuticals. Note: *New Zealand profit before tax includes head office expenses.

Rest of world revenues declined by 37.8% y-o-y in H123 to NZ$4.7m, due to the lack of licensing income. While income from royalties increased slightly to NZ$0.3m (H122: NZ$0.2m), product sales materially improved by 71.6% y-o-y as Maxigesic’s sales reach expanded to additional countries (51 in H123 vs 46 in FY22). However, the organic growth was more than offset by lower licensing income, which also translated into an operating loss of NZ$0.3m (vs NZ$3.3m in H122) from the market. In terms of progress in the Maxigesic IV rollout in H123, the formulation has now been launched in Ireland, Germany, Indonesia and Panama, registered in Pakistan and licensed in a number of countries including Canada, Iraq, Kurdistan, Colombia, Peru and Chile. As a reminder, the US rollout has been delayed following the FDA’s request in July 2022 for additional information on the packaging of the product. The FDA feedback requires AFT, along with partner Hyloris Pharmaceuticals, to initiate additional studies, which are expected to commence before end-CY22 with targeted completion by CY23 (following which both partners will submit its response to the FDA). We therefore do not anticipate any further milestone payments from Hikma until FY25. Management has also communicated that the rollout of Maxigesic (in all forms) in FY24 would be slower than anticipated previously due to AFT’s withdrawal from Russia, regulatory delays in some regions (including the United States) and slow rollout in Africa. As a result, AFT has revised down its target countries to 73 (from 90) by FY24.

Given the H123 performance and near-term portfolio expansion plans, AFT has revised its FY23 operating profit guidance downwards to NZ$18–23m, from NZ$27–32m. Management has indicated its plans to invest an additional NZ$10m in sales and distribution activities in FY23.

Valuation

We continue to value AFT using a discounted cash flow (DCF) valuation methodology. We have incorporated the recent H123 performance in our model and made some downward revisions to our forecasts based on the current trends and near-term visibility (more details in the financials section below). Our overall valuation falls to NZ$665m or NZ$6.34 per share, from NZ$680.8m or NZ$6.50 per share. Exhibit 2 captures the sensitivity of our valuation to terminal EBIT margin and revenue growth assumptions.

Exhibit 2: DCF sensitivity table (NZ$/share)

Terminal EBIT margin

Terminal revenue growth

30%

34%

36%

40%

45%

-2.0%

4.48

4.80

4.96

5.28

5.68

-1.0%

4.69

5.04

5.21

5.56

5.99

0.0%

4.94

5.32

5.51

5.90

6.38

1.0%

5.24

5.67

5.88

6.31

6.84

2.0%

5.63

6.11

6.34

6.82

7.42

3.0%

6.12

6.66

6.94

7.48

8.17

4.0%

6.77

7.41

7.73

8.37

9.16

5.0%

7.69

8.45

8.83

9.60

10.55

Source: Edison Investment Research

Financials

We have slightly decreased our revenue estimates for FY23–24 by NZ$3.7m and NZ$4.5m respectively, incorporating the delay in receiving the licensing milestone payment (estimated to be in the tune of US$6m) for Maxigesic IV from Hikma for the US market commercialisation (following the FDA’s decision to seek further information on the product’s packaging). The revenue decline has been offset in part by the better-than-expected performance from the domestic New Zealand markets as well as Asia and as such we have increased our revenue estimates for these geographies.

The major change to our forecasts is related to operating expenses, which were higher than anticipated in H123 due to increased sales and marketing expenses related to the 11 new product launches in the period. With further launches planned for H223 and FY24, we expect these expenses to remain above historical levels. In addition, the H123 operating margin was also affected by the lack of licensing-related income from international markets, which otherwise would drop down fully to the bottom line. Based on these trends, we trim our operating profit projections for FY23 (NZ$19.8m vs NZ$29.6 previously) and FY24 (NZ$33.5m vs NZ$46.0m previously) in line with the revised guidance.

Another change to our estimates is related to the dividend payout. We had previously anticipated AFT to pay an interim dividend in H223 followed by a final payment in FY24. However, we now assume the entire dividend payout to be made in one-go at the beginning of FY24.

The company reported NZ$8.8m in cash and NZ$38.2m in debt (excluding leases of NZ$3.1m) at end September 2022. We note that AFT holds an outstanding term loan from the Bank of New Zealand, of which NZ$30.2m is due for repayment in April 2023. However, AFT has communicated that it is in the process of renegotiating the term of the loan, which may result in an extension of the maturity date to April 2026. If this materialises, this should leave the company well capitalised to fund ongoing operations.

Exhibit 3: Financial summary

NZ$000

2021

2022

2023e

2024e

Year end 31 March

NZ GAAP

NZGAAP

NZGAAP

NZGAAP

PROFIT & LOSS

Revenue

 

 

113,105

130,314

152,240

189,727

Cost of Sales

(64,364)

(68,539)

(79,392)

(94,522)

Gross Profit

48,741

61,775

72,848

95,205

EBITDA

 

 

11,812

21,433

21,268

34,976

Operating Profit (before amort. and excepts.)

 

 

10,993

20,649

20,420

34,128

Intangible Amortisation

(285)

(260)

(595)

(595)

Exceptionals

0

0

0

0

Other

0

0

0

0

Operating Profit

10,708

20,389

19,825

33,533

Net Interest

(2,821)

(1,704)

(2,815)

(2,815)

Profit Before Tax (norm)

 

 

8,172

18,945

17,604

31,313

Profit Before Tax (reported)

 

 

7,887

18,685

17,009

30,718

Tax

(105)

1,163

(3,572)

(8,601)

Profit After Tax (norm)

8,067

20,108

14,032

22,712

Profit After Tax (reported)

7,782

19,848

13,437

22,117

Average Number of Shares Outstanding (m)

103.3

104.7

104.8

104.8

EPS - normalised (c)

 

 

7.1

19.2

13.4

21.7

EPS - (reported) (NZ$)

 

 

0.07

0.19

0.13

0.21

Dividend per share (c)

0.00

0.00

2.57

4.22

Gross Margin (%)

43.1

47.4

47.9

50.2

EBITDA Margin (%)

10.4

16.4

14.0

18.4

Operating Margin (before GW and except.) (%)

9.7

15.8

13.4

18.0

BALANCE SHEET

Fixed Assets

 

 

37,230

44,218

48,259

52,357

Intangible Assets

32,720

38,093

42,076

46,058

Tangible Assets

305

484

543

658

Investments

4,205

5,641

5,641

5,641

Current Assets

 

 

67,902

77,542

84,549

106,697

Stocks

33,654

33,500

39,707

43,678

Debtors

31,039

36,002

28,180

51,837

Cash

3,209

7,940

16,562

11,082

Other

0

100

100

100

Current Liabilities

 

 

(32,102)

(29,050)

(26,661)

(33,477)

Creditors

(26,404)

(23,845)

(25,456)

(32,272)

Short term borrowings

(5,161)

(4,000)

0

0

Other

(537)

(1,205)

(1,205)

(1,205)

Long Term Liabilities

 

 

(36,442)

(35,966)

(35,966)

(35,966)

Long term borrowings

(33,200)

(33,200)

(33,200)

(33,200)

Other long term liabilities

(3,242)

(2,766)

(2,766)

(2,766)

Net Assets

 

 

36,588

56,744

70,181

89,611

CASH FLOW

Operating Cash Flow

 

 

(2,231)

12,289

18,863

8,534

Net Interest

3,151

2,084

2,815

2,815

Tax

(170)

(221)

(3,572)

(8,601)

Capex

(6,231)

(5,585)

(5,484)

(5,541)

Acquisitions/disposals

0

0

0

0

Financing

11,673

295

0

0

Dividends

(188)

0

0

(2,687)

Net Cash Flow

6,004

8,862

12,622

(5,480)

Opening net debt/(cash)

 

 

37,081

35,152

29,260

16,638

HP finance leases initiated

0

0

0

0

Other

(4,075)

(2,970)

0

0

Closing net debt/(cash)

 

 

35,152

29,260

16,638

22,118

Source: Company reports, Edison Investment Research


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This report has been commissioned by AFT Pharmaceuticals and prepared and issued by Edison, in consideration of a fee payable by AFT Pharmaceuticals. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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General disclaimer and copyright

This report has been commissioned by AFT Pharmaceuticals and prepared and issued by Edison, in consideration of a fee payable by AFT Pharmaceuticals. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Germany

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United Kingdom

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United States of America

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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