Solid FY20 results

AFT Pharmaceuticals 21 May 2020 Update
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AFT Pharmaceuticals

Solid FY20 results

Financial update

Pharma & biotech

21 May 2020

Price

NZ$4.66

Market cap

NZ$468m

NZ$0.61/US$

Net debt (NZ$m) at 31 March 2020

37.1

Shares in issue

100.5m

Free float

21.6%

Code

AFT

Primary exchange

NZX

Secondary exchange

ASX

Share price performance

%

1m

3m

12m

Abs

9.9

23.0

73.9

Rel (local)

9.7

38.7

69.9

52-week high/low

NZ$4.72

NZ$2.58

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

Additional Maxigesic launches

2020

Analysts

Maxim Jacobs

+1 646 653 7027

Wiktoria O’Hare

+1 646 653 7028

AFT Pharmaceuticals is a research client of Edison Investment Research Limited

AFT Pharmaceuticals recently reported its FY20 results. Operating revenue grew by a strong 24.0% year-on-year to NZ$105.6m as there was at least double-digit growth across all regional segments and triple-digit growth in South-East Asia. Importantly, the company reported operating profit of NZ$21.2m (including a NZ$9.8m non-recurring gain), up from a reported NZ$6.1m the year before, and is guiding for operating profit of NZ$14–18m in FY21.

Year end

Revenue (NZ$m)

PBT*
(NZ$m)

EPS*
(NZ$)

DPS
(NZ$)

P/E
(x)

Yield
(%)

03/19

85.1

(2.5)

(0.03)

0.0

N/A

N/A

03/20

105.6

2.8

0.02

0.0

N/A

N/A

03/21e

125.1

15.5

0.15

0.0

31.1

N/A

03/22e

146.5

27.2

0.23

0.0

20.3

N/A

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

Strong growth in Australia and New Zealand

Revenue in Australia was up 22.1% in FY20 compared to the prior year. The over-the-counter (OTC) channel grew by 25% thanks to Maxigesic as well as AFT’s eye care products and natural medicines. New Zealand grew by 12.4% in FY20. This compares very favourably to the 1.1% decline (5.4% growth after adjusting for divested products) in FY19. The OTC channel was the main driver, which grew by 24% thanks to the pain, eyecare, natural medicine and allergy categories.

Maxigesic launched in 28 countries

Maxigesic is now sold and launched in 28 countries, up from 20 in the prior year thanks in part to launches in Spain, Portugal and the Nordics. Launch orders for an additional 10 countries were delayed due to a temporary paracetamol export ban announced by the Indian government. Maxigesic is licensed in more than 125 countries and registered in 44 countries. AFT expects Maxigesic to be sold in around 125 countries by the end of FY22.

Limited negative impact from COVID-19

Apart from some clinical trial delays and the temporary issue with paracetamol product supply, AFT has seen a limited negative impact from COVID-19. If anything, it may be benefiting as AFT’s sales of the Maxigesic family of products, vitamins and hospital antibiotics have all increased. Additionally, the company has commented that the first month of FY21 (April 2020) was significantly ahead of the prior year.

Valuation: NZ$596m or NZ$5.94 per share

We are increasing our valuation to NZ$596m or NZ$5.94 per share, from NZ$539m or NZ$5.53 per share, mainly due to rolling forward our NPV and increased revenue estimates as sales were stronger than expected. This was partially offset by lower near-term gross margin. The company reported NZ$6.1m in cash and NZ$43.2m in debt at the end of FY20. We believe the company will be able to pay down the debt from operating cash flow and is not in need of additional financing.

FY20: A growth year

AFT has reported revenue of NZ$105.6m for FY20, the period ending 31 March 2020. This represents a 24.0% increase over FY19 as all four regions posted solid growth. Revenue in Australia was up 22.1% in FY20 compared to the prior year, to NZ$61.4m. The OTC channel, which represents 63.5% of revenue for Australia, grew 25% thanks to Maxigesic as well as AFT’s eye care products and natural medicines. The hospital channel grew by 16% and was helped by the launch of new hospital products (such as the antibiotic Piptaz (Piperacillin/tazobactam)). The prescription channel grew 23% to NZ$6.3m with the introduction of a new product. Operating profits rose to NZ$7.3m in Australia from NZ$5.3m last year.

New Zealand grew 12.4% in FY20 to NZ$30.1m. This compares favourably to the 1.1% decline (5.4% growth after adjusting for divested products) in FY19. The OTC channel was the main driver, which grew 24% to NZ$17.4m thanks to the pain, eyecare, natural medicine and allergy categories. Growth was also helped by newly launched digestive health products. Maxigesic sales (included in the OTC channel in New Zealand) are likely to see an additional boost in FY21 as codeine-containing products (a major competitor in the pain area) are expected to move from OTC to prescription only. For the other product categories, the hospital channel declined by 8% to NZ$4.0m, while the prescription channel grew 2% to NZ$8.7m. Operating profit (excluding head office costs) increased from NZ$5.1m to NZ$5.3m.

South-East Asia grew well, with revenue up by 130% to NZ$4.9m from NZ$2.1m in the prior year. The hospital channel was particularly strong and grew 175% thanks to two new products in Singapore and Malaysia. Operating profit was NZ$0.1m, up from a NZ$0.3m loss in FY19.

Exhibit 1: FY20 results by segment

NZ$000s

Revenues (2020)

Revenues (2019)

Operating profit before tax (2020)

Operating profit before tax (2019)

Australia

61,428

50,304

7,278

5,321

New Zealand

30,108

26,796

(205)*

537

Asia

4,930

2,142

93

(343)

Rest of world

9,131

5,885

14,040**

601

Total

105,597

85,127

21,206

6,116

Source: AFT Pharmaceuticals. Note: *New Zealand profit before tax includes head office expenses; operating profit without these expenses were NZ$5.3m. **Rest of world profit before tax includes a non-recurring gain of NZ$9.8m, without this gain profit before tax for this region would have been NZ$4.3m.

Rest of world revenues, which are driven mainly by Maxigesic sales, grew 55% to NZ$9.1m. Maxigesic is now sold and launched in 28 countries, up from 20 the prior year. FY20 launches of note include Spain and Portugal and the Nordic countries, with launches pending in Belgium, Luxembourg, France and Germany. Around NZ$1m in launch orders for 10 countries were delayed due to a COVID-19-related Indian government restriction on the export of products containing paracetamol. This export ban has since been lifted and the launch orders will count towards FY21. AFT expects Maxigesic to be sold in around 125 countries by the end of FY22. Maxigesic IV is progressing; it had licensing agreements in 80 countries and registration in three (Australia, New Zealand and the United Arab Emirates) by the end of FY20 and has had an additional 18 since (including the EU). A study that was required for approval by the US FDA has been delayed due to COVID-19 related issues but is expected to be completed by the end of July, with a filing in the US by the end of the calendar year.

Exhibit 2: Maxigesic product country totals by status

Maxigesic tablets

Maxigesic IV

Maxigesic oral solution

2020

2019

2020

2019

2020

2019

Licensed

125+

125+

80

68

122

122

Registered

44

42

3

Sold in

28

20

Source: AFT Pharmaceuticals

With regards to NasoSURF, there have been some programme delays related to COVID-19 as production and development of the product is based in China. A Class IIa medical device filing with the FDA is expected in FY21. The 120-patient Pascomer Phase II/III clinical study has begun although there have been delays in recruitment due to COVID-19. Enrolment is restarting in May.

Valuation

We are increasing our valuation to NZ$596m or NZ$5.94 per share from NZ$539m or NZ$5.53 per share, mainly due to rolling forward our NPV and increased revenue estimates as sales were stronger than expected. This was partially offset by lower near-term gross margins.

Exhibit 3: DCF sensitivity table (NZ$/share)

Terminal EBIT margin

Terminal revenue growth

30.00%

34.00%

36.0%

40.0%

45.0%

-2%

3.99

4.33

4.49

4.83

5.25

-1%

4.20

4.57

4.76

5.12

5.58

0%

4.46

4.87

5.07

5.48

5.98

1%

4.78

5.23

5.46

5.90

6.47

2%

5.18

5.68

5.94

6.44

7.07

3%

5.69

6.26

6.55

7.13

7.85

4%

6.36

7.04

7.37

8.05

8.89

5%

7.31

8.12

8.52

9.33

10.34

Source: Edison Investment Research

Financials

We have increased our revenue estimates for FY21 to NZ$125.1m from NZ$120.8m previously. We do not expect COVID-19 to have a negative impact on revenues; it may have a positive effect as AFT’s sales of the Maxigesic family of products, vitamins and hospital antibiotics have all increased due to the pandemic. AFT has also introduced the Crystawash hand sanitiser to take advantage of emerging consumer behaviour. Additionally, the company has commented that the first month of FY21 (April 2020) was significantly ahead of the prior year.

We have reduced our FY21 gross margin estimate from 51.9% to 48.8% as it fell in FY20 compared to FY19 (from 47.8% to 45.7%). However, we continue to expect it to increase over the long term as high margin Maxigesic royalties and licence payments in the rest of the world become bigger components of the total income statement. We have also made small adjustments to SG&A and R&D for FY21. We have increased SG&A by NZ$1.8m and decreased R&D by $0.6m. After these changes, our FY21 PBT estimate is NZ$15.5m compared to NZ$16.4m previously. We are also introducing FY22 estimates, which feature revenues of NZ$146.5m (up 17.1% compared to FY20) and PBT of NZ$27.2m.

Exhibit 4: Edison forecast changes

2021e

2022e

Old

New

New

Revenue (NZ$m)

120.8

125.1

146.5

PBT, normalised (NZ$m)

16.4

15.5

27.2

EPS, normalised (NZ$)

0.17

0.15

0.23

Source: Edison Investment Research

AFT reported NZ$6.1m in cash and NZ$43.2m in debt at the end of FY20. AFT refinanced its debt recently, replacing a 13.5% facility from Capital Royalty Group with one from the Bank of New Zealand with approximately 8.5% interest, allowing the company to save on interest costs. NZ$2m in principal will be due in the first year and NZ$10m total will be due over three years. We believe AFT will be able to pay down the debt from operating cash flow and is not in need of additional financing.

Exhibit 5: Financial summary

NZ$000

2019

2020

2021e

2022e

March

NZ GAAP

NZ GAAP

NZ GAAP

NZ GAAP

PROFIT & LOSS

Revenue

 

 

 

85,127

105,597

125,117

146,483

Cost of Sales

(44,397)

(57,332)

(64,045)

(69,711)

Gross Profit

40,730

48,265

61,073

76,772

EBITDA

 

 

 

5,797

10,322

18,152

29,531

Operating Profit (before amort. and except.)

 

 

 

5,912

11,136

18,966

30,345

Intangible Amortisation

204

286

286

286

Exceptionals

0

9,784

0

0

Other

1,716

0

478

502

Operating Profit

7,832

21,206

19,729

31,132

Net Interest

(8,375)

(8,329)

(3,494)

(3,155)

Profit Before Tax (norm)

 

 

 

(2,463)

2,807

15,472

27,190

Profit Before Tax (reported)

 

 

 

(2,259)

12,877

16,236

27,978

Tax

(168)

(185)

0

(3,847)

Profit After Tax (norm)

(2,631)

2,622

15,472

23,343

Profit After Tax (reported)

(2,427)

12,692

16,236

24,131

Average Number of Shares Outstanding (m)

97.3

97.3

100.5

100.5

EPS - normalised ($)

 

 

 

(0.03)

0.02

0.15

0.23

EPS - (reported) (NZ$)

 

 

 

(0.03)

0.12

0.16

0.24

Dividend per share (c)

0.00

0.00

0.00

0.00

Gross Margin (%)

47.8

45.7

48.8

52.4

EBITDA Margin (%)

6.8

9.8

14.5

20.2

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

6.9

10.5

15.2

20.7

BALANCE SHEET

Fixed Assets

 

 

 

12,334

31,716

33,866

36,059

Intangible Assets

8,239

26,984

29,047

31,110

Tangible Assets

357

315

402

533

Investments

3,738

4,417

4,417

4,417

Current Assets

 

 

 

51,261

55,336

65,969

84,897

Stocks

25,158

22,734

25,007

27,508

Debtors

19,187

25,969

23,372

22,856

Cash

6,916

6,119

17,076

34,018

Other

0

514

514

514

Current Liabilities

 

 

 

(58,504)

(25,102)

(20,994)

(22,480)

Creditors

(16,368)

(22,993)

(20,994)

(22,480)

Short term borrowings

(41,750)

(2,000)

0

0

Other

(386)

(109)

0

0

Long Term Liabilities

 

 

 

0

(44,695)

(44,695)

(40,695)

Long term borrowings

0

(41,200)

(41,200)

(37,200)

Other long term liabilities

0

(3,495)

(3,495)

(3,495)

Net Assets

 

 

 

5,091

17,255

34,147

57,781

CASH FLOW

Operating Cash Flow

 

 

 

9,610

21,999

19,187

31,237

Net Interest

(8,375)

(6,936)

(3,494)

(3,155)

Tax

(168)

(185)

0

(3,847)

Capex

(3,465)

(6,562)

(3,250)

(3,293)

Acquisitions/disposals

(1,419)

0

0

0

Financing

0

3

0

0

Dividends

(134)

(566)

0

0

Net Cash Flow

(3,951)

7,753

12,443

20,943

Opening net debt/(cash)

 

 

 

23,708

34,834

37,081

24,124

HP finance leases initiated

0

0

0

0

Other

(7,175)

(10,000)

(0)

0

Closing net debt/(cash)

 

 

 

34,834

37,081

24,638

3,182

Source: company reports, Edison Investment Research

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 £49,500 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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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.

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New Zealand

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.

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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.

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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 £49,500 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 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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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.

New Zealand

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.

Frankfurt +49 (0)69 78 8076 960

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Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 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

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

1,185 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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