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.