Were Aspen’s results really that bad? R18.5bn bad?


Were Aspen’s results really that bad? R18.5bn bad?

Shocking drop in share price after investors take a dim view of drug maker’s prospects, but was it overdone?

Tamar Kahn

Africa’s biggest drug maker Aspen Pharmacare shed R18.5bn of its value on Thursday after the market took a dim view of the price it got for the sale of its infant milk business and it reported earnings that fell short of expectations.
Aspen’s share price took its biggest intra-day knock in two decades, plunging by as much as 26% before recovering to close 14.8% lower at R232.06, leaving its market capitalisation at R105.9bn.
The one-day decline dwarfs the market value of local drug maker Adcock Ingram, which is worth R11.1bn.
Aspen said it was selling its infant milk business to French dairy giant Lascalis for €739.8m (R12.9bn, or $860m), falling short of the $1bn to $1.5bn the market was expecting for the unit. The proceeds would be used to pay off debt, Aspen said.
An aggressive acquisition spree has seen the group’s net borrowings increase by 26% to R46.78bn at year-end.
Aspen’s results also fell short of expectations, with group revenue for the year to end June increasing by a mere 3% year-on-year to R42.6bn. After-tax profit rose 10% to R7.3bn.
The drugmaker, which has been criticised for a lack of transparency in the way it reports its results, was for many years predominantly a generic pharmaceutical manufacturer, but in 2014 began a series of acquisitions that shifted its focus into niche, branded products such as anaesthetics and thrombosis drugs.
“Investors don’t buy the Aspen story any more. (They) have come to the realisation that Aspen management haven’t given them performance figures of the existing business for years ... for good reason. If you consider the billions that they’ve spent over the past few years and revenue only moves by 3%, then surely there is something wrong?” said Casparus Treurnicht, portfolio manager at Gryphon Asset Managers.
“The (sale) of the nutritionals business is confirmation that they must sell something to save the balance sheet even if it means contradicting the growth story proclaimed before,” he said.
Vestact CEO Paul Theron said the slump in the share price reflected investors’ realisation that Aspen was competing in a tough global arena.
“Six or seven years ago Aspen was really flying. Everyone loved (CEO) Stephen Saad and his swashbuckling style and his big stake in the company. Now there is a sobering up: it’s a bit like having a star soccer player national squad who then gets bought by Manchester United and then can’t get any first team game time,” Theron said.
This is not the first big knock Aspen has taken in recent years. On January 9, its share price slumped 10%, before recovering, on speculation that it was a target of short-sellers Viceroy Research.
Viceroy rose to fame after publishing a highly critical report on disgraced furniture retailer Steinhoff in December 2017, as former CEO Markus Jooste stepped down. And the market punished Aspen in April 2017 for failing to disclose it had been fined €5.2m by Italian authorities for price gouging.
However, Old Mutual Equities portfolio manager Philip Short said the scale of the fall in Aspen’s share price was surprising, as there was nothing structurally wrong with the business.
“I would have expected a drop of two or three percent, even with the lower than expected infant milk formula number. The two areas of the business where they disappointed – the third party manufacturing and the high potency cytotoxics – are relatively small parts of the business,” he said.
“It is a sign of the times. Everything is volatile. Even a low volatility stock like British American Tobacco was up 6% on Wednesday on regulatory news in the US,” said Short.
Tobacco stocks surged on Wednesday after the US Food and Drug Administration threatened to pull e-cigarettes from shelves if manufacturers did not do more to control teen use.
Aspen declared a dividend of 315 cents per share, up 10%.

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