Why Aspen is ripe for a takeover
Fall in share price means pharmaceutical giant could be a target — but its healthy monthly profit gives it options
Stephen Saad’s phone must be ringing off the hook from prospective buyers of pharmaceutical company Aspen, after its surprise 31% share price drop in the past week left the stock at its cheapest level yet.
It must have unnerved Saad, 54, who founded the group 21 years ago in a house in Durban, as it came after full-year results that weren’t awful: revenue was up 3% to R42.5bn and pre-tax earnings rose 5% to R12bn.
"Look, I don’t watch the share price much, but the fall was still a shock," says Saad in an interview with the FM.
"Before the results, I thought the strategic imperative was to deleverage the balance sheet, so I thought the share might rise. I don’t always get the market reaction right, but I never, ever get it this wrong."
What really smacked Aspen was that it sold its infant milk business for $860m to French company Lactalis — lower than the $1bn the market expected.
Of course, $1bn was never likely.
As it was, the price was rich enough: about 24 times that business’s contribution to Aspen’s earnings. In rand terms, it was getting R12bn for a business it bought for less than R4bn four years before.
This is why Saad says he thought the Lactalis deal "was a huge positive". And yet the reaction was brutal, with Aspen’s price tumbling to R187 a share — its lowest since April 2013.
Analysts slashed their expectations too.
Last week, the average price target for Aspen shares over the next year was R310 a share; after the results it was R266.
In its report, Bank of America Merrill Lynch cut Aspen from a "buy" to a "hold" and slashed its target price 63% to R205.
The reasons: "lower growth", high levels of debt (R46.7bn) and "more uncertainty".
It says: "Operationally, growth was lower than we expected and seems likely to remain low, with no acquisitions."
It’s true there were real weak points in Aspen’s results. Its manufacturing arm was the worst, as revenues fell 22% and earnings were R350m lower than last year. On the bright side, sales of anaesthetics soared 21% (to R8.3bn) and thrombosis medication grew 12% (to R6.4bn).
JPMorgan, in its new report, called Aspen a "buy", even though it also dropped its share price expectations to R318 (from R352).
While it says the share price fall was "harsh", the analysts say the market has "become increasingly sceptical of Aspen’s business model, and grown tired and increasingly less forgiving of earnings misses".
Unlike Bank of America Merrill Lynch, JPMorgan reckons the Lactalis sale should put Aspen in a position to begin making further acquisitions.
Still, the picture painted by analysts was that Aspen, until now a poster child for "growth" companies, was becoming a mature business, unlikely to see the heady days of 20% annual growth again.
As brokerage Vestact puts it: "Until five years ago, Aspen regularly delivered 30%-40% annual growth in earnings … it stood alone in our market, a fresh new company in the exciting global pharmaceutical industry."
But after hitting the acquisition trail in Australia, Europe, Asia and the US, it bumped heads with (better-resourced) global pharmaceutical giants.
Saad disagrees that the good days are behind it, pointing out that the company makes R1bn in profit every month.
"Look, we had organic growth of 4.5% — it’s not massive growth, but I’m comfortable with it. If someone said to me, ‘Stephen, I can give you 4.5% growth for 10 years’, I’d leap at it," he says.
It’s clear Aspen still packs considerable punch. As Saad’s famously enthusiastic results presentations emphasise, it is the "only truly global multinational pharma company based in an emerging market".
If you exclude the US market, it is the largest anaesthetics manufacturer in the world, and in SA one out of every five products dispensed are made by Aspen. Since 1997 its compounded annual growth rate has been 26% a year.
Nor does Saad like the suggestion that Aspen fell short of its promises.
"What have we overpromised? We haven’t disappointed anyone in 20 years. Every single year, including this one, we’ve had growth on the prior year. We’re not a self-admiration society, but that’s something we take pride in," he says.
"The vision we have now will be understood in time."
This illustrates how there is still something of the ever-optimistic, scrappy, small-town entrepreneur about Saad. It is why, while some believe Aspen shouldn’t be buying anything else, Saad says he is entirely in the market for acquisitions that "fit in with our existing base — we have plans".
The fall in the share price means Aspen’s stock is cheaper than ever. Analysts’ estimates for next year’s results put the company’s share price of R187 a share on a forward ratio of around 10 times its expected earnings.
This makes Aspen a target for a corporate raider, another health-care company looking for an emerging-market arm, or even a private equity buyer.
On this point, Saad won’t comment other than to say: "I’ve had some interesting calls in the past week."
Ironically, the same reason for part of the selloff – widespread scepticism of SA companies – could be a deterrent to any raider.
As Saad says: "People are scared of emerging markets, and they’re scared of SA companies after Steinhoff’s collapse in December. We cannot ignore these concerns and have adjusted some of our plans to cater for those investor fears."
Vestact agrees: "Investors are losing confidence in SA corporates … it will take time for that confidence to return — it will have to be earned back."
It’s a good point. So for Saad, the best way to demonstrate Aspen’s business model is to keep churning out that R1bn profit each month, irrespective of the share price.