Australia | Jan 17 2008
By Chris Shaw
The Australian sharemarket may have started 2008 poorly but not all companies have struggled in the early going, with Southern Cross Equities suggesting Australian Pharmaceutical Industries ((API)) is enjoying a still positive retail environment and is taking advantage of this with new store openings.
As a result the broker has given the company a Buy rating, estimating the shares could deliver as much as a 60% return over the next 12 months. This makes Southern Cross the second broker to take a positive view on the stock in recent months following Deutsche Bank’s upgrade to Buy from Hold just prior to Christmas.
The Southern Cross view is underpinned by not only the favourable retail outlook but by the fact the group’s expansion of its Priceline operations will create significant value. On analyst Stuart Roberts’ numbers the division could be generating EBITDA of more than $90 million by FY11 and this implies a valuation of around $900 million, which is more than the current capitalisation of the whole company.
Roberts points out this means investors are getting the wholesale business for free if they take a 2-3 year view.
Such growth appears possible as his analysis of the Priceline model shows significant repeat business from franchisees, which in turn allows the company to maintain its brisk pace of new store openings.
It is worth noting this creates some risk as a number of the Priceline stores are located in Centro-run centres, which implies a potential downturn if new management doesn’t do as good a job in maintaining shopper numbers.
The broker acknowledges this but takes the view any weakness is a buying opportunity, as with further openings scheduled the group’s “Centro†exposure as a portion of the total division will continue to decline.
On the broker’s numbers the group will deliver the first part of its earnings turnaround this year, as after a loss of $11.3 million in FY07 a profit of $16.6 million is expected this year, growing to $28.7 million in FY09. In EPS (earnings per share) terms this implies outcomes of 6.4c this year and 11.2c next year.
On a DCF (discounted cash flow) basis the broker calculates a valuation of $2.22 taking a base case view, while a more optimistic view implies a valuation of $3.22. Taking the midpoint of this range the broker has set its target price at $2.80.
This remains well above the rest of the market as the FNArena database shows an average price target of $2.04 and Thomson One Analytics has a median price target of $2.07. The database shows the stock as rated as Buy and Sell once each with three Hold ratings.
Today shares in API are down 3.5% at $1.72, which compares with a range over the past 12 months of $1.65 to $2.48.