26 May 2020:  Taylor Collison: Probiotec (PBP):  Update - Industry normalizing

TC have an "Outperform" call on PBP, but no price target.  They have a DCF valuation of $2.13.  PBP closed yesterday at $1.91.

Excerpt:

Our View:  We retain our Outperform rating and forecasts. We believe that underlying demand is strong, FY21 will benefit from past acquisitions and cost synergies. The business may also be able to bolt on further accretive acquisitions. Recent contract wins should feed into FY21 results as these contracts ramp up. We have derived a DCF valuation of $2.13.  

In late April Probiotec announced that it had been fully operational during the COVID-19 crisis and continues to trade strongly. FY20 guidance was re-iterated with sales expected to be excess of $100m and EBITDA of between $16-$17m. There has been minimal supply chain disruption despite some press suggesting ingredient access problems out of China and India. Probiotec had seen meaningful uplift in orders for coughs, cold/flu, analgesics and immunity products.

Key Points 

Recent update and our analysis

• The late April Probiotec update re-iterated guidance for FY20. The market may have been hoping for an upgrade due to the March and early April COVID-19 panic buying.
• Recent industry feedback and commentary from listed wholesale/chemist shops players API (API, not covered) and Sigma (SIG, not covered) also indicates a return to more normal conditions in April and May.
• The actual cold and flu season might be much reduced this year due to social distancing, higher flu vaccination rates and more frequent hand washing by the community. We believe that colds are more of a driver than the fully fledged flu for Probiotec.
• This is partly why the traditional spike may not occur and leave some stock in the channel.
• Panic buying will result in some stock exceeding expiry dates (and being thrown out) and may also have pulled some demand forward. The driver will by the resumption of the actual cold/flu season.

Late April update and our analysis

• We also review our forecasts for FY21 and believe that upside exists. We assess the quite specific reasoning around our FY21 EBITDA forecasts (acquisitions/full year contribution, premises savings, new contract wins). We believe that FY21 is very achievable.
• The business may also be able to accretively acquire bolt-on(s) - given the recent bedding down. We have not factored this in – but like this optionality.  
• Risks – include loss of contracts, in-house competition, product quality, increased competition and integration of acquired business. 

--- click on link above for the full update ---

Disclosure:  I don't hold any PBP shares.

30-March-2020:  Taylor Collison: Probiotec (PBP): "Update and upgrading recommendation”

TC’s Recommendation: Outperform

Excerpts: 

Our View

We upgrade to an Outperform recommendation (from Hold) noting as a contract pharmaceutical and OTC medicine manufacturer – Probiotec is very likely to be enjoying strong demand for many of its products.  The share price fall has also improved the absolute valuation. We also note that the recent structural reform to allow widespread bulk billing via telemedicine (and prescriptions) is a positive development.

The February pre-flagged result was driven via both acquired sales growth and organic sales growth (+17%) in the traditional business.  Recently acquired business added $6.9m of revenue to the total $44.1m. 

Key Points – from February result

Revenue and EBITDA

• Sales were up strongly with 34% growth to $44.1m with the core Laverton business reporting 17% organic revenue growth.
• EBITDA was up 61% to $5.9m – in a seasonally quiet 1H. The 2H is always busier due the flu and cough season stimulating demand.
• Recently acquired business (ABS) is performed to expectations.

Growth

• The business will benefit from a greater contribution from newly acquired businesses into the seasonally busier 2H. The seasonal EBITDA split is normally 1H =35%-40% / 2H = 65%-70% (excluding acquisitions).
• The February presentation notes that business has won a range of new work from existing customers and won a new a major new packing contract from a leading Australian health care company.  We are suggest that this could be in the one to two million(s) in new revenue p.a, starting in 2H20 (c5-10% of  Packing’s  turnover),  Packing (South Pack/ABS) is projected to turn over c$24.6m in FY20.  
• New customers are being approached after the acquisition of ABS and CPSA customers. CPSA is expected to contribute $2.0m-$2.5m in EBITDA in FY21.

Cashflow/balance sheet

• Operating cashflow of +$8.3m included a $1m catch up payment from a late payer in 2H19. Past cashflow has been complex due to the business divestment and acquisition program.
• The balance sheet has net $3.8m – which is low. 

Changes to forecasts

• We are leaving our forecasts for FY20 unchanged. We are however lifting our assumptions for the FY21 year due to acquired growth and growth in the new and existing customer base. EPS rises 5.5% as a result of the changes.  
• There is risk surrounding the COVID19 virus – however Probiotec is well placed to supply increased medicine demand. Spare capacity acquired capacity and being somewhat vertically integrated and located in Australia are all useful characteristics in the current tough environment.

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