Australia | Aug 19 2008
By Andrew Nelson
Primary Healthcare ((PRY)) has announced the sale of its pharmacy assets to Hong Kong headquartered Zuellig Pharma Ltd. The sale nets Primary $505m at an earnings multiple of 6.5 times and is not good news for Australian Pharmaceutical Industries ((API)).
A July assessment by ABN Amro (Morgans) points at Zuellig’s reputation in the market for being an aggressive competitor while “taking a longterm view”. This suggests the new owner would be willing to carve out a larger market share, and bear losses in the meantime, focusing on longterm benefits instead.
ABN Amro analysts had taken the view there would be obvious synergies and operational benefits for Australian Pharmaceutical if it were able to acquire Primary’s distribution assets. Now that this won’t happen, it is the stockbroker’s view there are no obvious reasons to currently own shares in the company.
Leaving the prospect of an incredibly difficult trading environment aside, ABN Amro feels the precedent set by the sale means API is now worth substantially less than its current share price and is recommending a switch into Primary Healthcare.
Using the broker’s math: ABN’s current FY08 forecast earnings for API is $64.5m. The above earnings multiple of 6.5 times makes the company worth $419m. Now you subtract securitised debt of $294m and you’re left with $125m, or 49c per share.
Not great news for API shareholders who are sitting on shares trading at 69c.
Not offering much of a silver lining, the broker says there is some upside risk relating to potential corporate activity. Yeah, well cross your fingers.