API - Australian Pharmaceutical Industries

[Country Lad]

Hard to believe how quiet this thread is.

Probably because the price has been quiet. I didn't think it worthwhile posting while I had them for about 6 months because nothing was happening, even though the fundamentals seemed OK. Got bored with them and sold end August. Only consolation is that the one I bought at the same time has done better.

Cheers
Country Lad

 

[McLovin]

Interesting. I think it's a pretty cr@p business but it certainly could get a share price pop when it reports. If they report $60m EBIT then they're on about 6.5x EV/EBIT. Not super cheap but probably with some room to move up.

 

[UMike]

I topped up a fair bit at the 44c mark and planned to have offloaded around this mark already but have held of while the buyers more than double the sellers atm.

Still got my 57.5c pipe fream sell order in and as it has just jumped to 54c am looking at it with much more interest.

 

[Ves]

Possibly some kind of earnings multiple re-alignment or earnings momentum play in here somewhere - but not my game.

Looked at this recently enough and, as a long-term investment, I put a line through API.

Pharmaceutical businesses (including any of manufacturing, distribution and shop-face) are a tough gig. Working capital demands are usually high and API is no exception to this rule (they also have added bonus of needing more P & E to manufacture some of their products). There are also government legislation changes to worry about from time to time (see SIP in particular, these two share a few similarities).

EBIT in this company has not gone any where for 10 years. It's in a cyclical range. The business survives, but there is no competitive advantage. Note the low Return on Capital, Return on Equity, Return on Assets and the profit margins... any of its metrics, they all tell a similar story. I am not convinced that there is an underlying reason for this to change dramatically in the future.

For the last half underlying EBIT is still within this range and hasn't moved much on the pcp ($29.9m vs 28.9m).

Cash flow was higher in the 1H13 vs pcp because there was reduction in working capital of about $26m. There is no evidence that there working capital requirements will be continually reduced in the future (unless the business winds down).

Don't forget that their costs of maintaining the current business (maintenance capex etc) have to come off cash flow before have a true picture of the cash that this business generates.

It would appear that this often trades to a fairly large discount to its net tangible assets due to low returns on capital invested vs their cost of capital. There is no point paying a full dollar if every dollar that they keep in the business could lose its purchasing power in the future.

 

[Garpal Gumnut]

I've been back in to API.

It's broken out of a long term trading range.

It has legs now.

I always compare it to SIP, it's main competitor which is going down.

A 5 yr monthly comparo.

gg

 

[McLovin]

Possibly some kind of earnings multiple re-alignment or earnings momentum play in here somewhere - but not my game.

Looked at this recently enough and, as a long-term investment, I put a line through API.

Pharmaceutical businesses (including any of manufacturing, distribution and shop-face) are a tough gig. Working capital demands are usually high and API is no exception to this rule (they also have added bonus of needing more P & E to manufacture some of their products). There are also government legislation changes to worry about from time to time (see SIP in particular, these two share a few similarities).

EBIT in this company has not gone any where for 10 years. It's in a cyclical range. The business survives, but there is no competitive advantage. Note the low Return on Capital, Return on Equity, Return on Assets and the profit margins... any of its metrics, they all tell a similar story. I am not convinced that there is an underlying reason for this to change dramatically in the future.

For the last half underlying EBIT is still within this range and hasn't moved much on the pcp ($29.9m vs 28.9m).

Cash flow was higher in the 1H13 vs pcp because there was reduction in working capital of about $26m. There is no evidence that there working capital requirements will be continually reduced in the future (unless the business winds down).

Don't forget that their costs of maintaining the current business (maintenance capex etc) have to come off cash flow before have a true picture of the cash that this business generates.

It would appear that this often trades to a fairly large discount to its net tangible assets due to low returns on capital invested vs their cost of capital. There is no point paying a full dollar if every dollar that they keep in the business could lose its purchasing power in the future.

+1

And welcome back.

 

[Ves]

+1

And welcome back.

Cheers - feeling a lot fresher after a break.

 

[PinguPingu]

Another strong day ahead of prelim report, commsec has it estimated for Thurs?

 

[UMike]

I sold one bloody share at 57.5c WTF


And it closes at 56c......
Hope it is a good report.

 

[Garpal Gumnut]

I sold one bloody share at 57.5c WTF
View attachment 54889

And it closes at 56c......
Hope it is a good report.

I have for may years, UMike, mate, looked at course of sales, and always wanted to converse with the bloke who sold, one share.

G'day.

API is a good stock. The charts say it will be a good report.

Let us wait and see.

gg

 

[UMike]

Ah well I only have another 29,999 to go. (Gonna sit on the rest)

I am hoping it won't be a buy on the rumour sell on the fact day tomorrow..... We'll see.

 

[PinguPingu]

Finishing the day on a high, very strong day with market overall down. Happy to be in at 0.54cents riding the wave spurred by the yield chasers

Nice to see one of my holdings actually having a bit of a run.

 

[laurie]

API must be on steroids how it missed a speeding ticket from .44c is amazing

 

[brty]

API's cashflow went up 38% on the prior year, plus price at 64c is only 4.7 times cashflow. No need for a speeding ticket, it was massively undervalued at the 44c price. The dividend has risen 30% (from 2.5c/s to 3.25c/s) over the last 2 years (fully franked).

On the piotroski f-score, it is one of the few 9's in the market.

Technically, it has just broken upwards out of a year long sideways/triangle pattern, plus is at 4 year highs.

It was a beautiful set-up; anyone that bought as it broke upward out of the downtrend (overdone), and added on breaks upward out of corrections would be many thousands ahead. In today's market there was an obvious larger player (maybe morethan one?) trying to grab plenty of stock.

 

[Fartichoke]

Trading halt and now suspended.

"pending the release of an announcement regarding the carrying value of its assets"

Any ideas?

 

[McLovin]

Does anyone understand what's going on with the financial guarantees (note 20)? I'm struggling to follow it. As I understand, API issues guarantees to its customers, these are recognised as a fair value liability initially and then amortised over the life of the guarantee. Where I get confused is that API recognised a provision for ~$28m because, presumably, a guarantee was about to be exercised by a bank. However, it then turned out that it wasn't so they reveresed the provision and transferred it to provision for doubtful debts. Why is the full amount being transferred?

Maybe I've been staring at this for too long but I've really got no idea how to follow this.

Anyone?

 

[Ves]

Does anyone understand what's going on with the financial guarantees (note 20)? I'm struggling to follow it. As I understand, API issues guarantees to its customers, these are recognised as a fair value liability initially and then amortised over the life of the guarantee. Where I get confused is that API recognised a provision for ~$28m because, presumably, a guarantee was about to be exercised by a bank. However, it then turned out that it wasn't so they reveresed the provision and transferred it to provision for doubtful debts. Why is the full amount being transferred?

Maybe I've been staring at this for too long but I've really got no idea how to follow this.

Anyone?

Does reading the announcement on 2 October 2013 help? My understanding is that they loaned money to their franchisee pharmacies and this was not repaid under the initial terms (this amount is in the long-term receivables). As a big chunk of this money could not be repaid immediately a much later payment date was arranged with the pharmacies (1 October 2018, I believe).

As these amounts have to be recognised at fair value (taking into account factors influencing probability of repayment as explained in notes 20 and 22) they made a provision in the 2012 accounts tto recognise that these receivables were worth less than the full dollar owing. In the 2013 financial year this was reversed / moved to the assets side of the balance sheet (see note 9) rather than showing as a separate provision on the liabilities side. You can see that $24.784m is still reducing the assets under this note. The balance of the $28.650m (an amount of $3.866m), well this is a mystery to me. I assume it ended up in the current trade debtors provision.

Let me know what you think?

 

[McLovin]

Does reading the announcement on 2 October 2013 help? My understanding is that they loaned money to their franchisee pharmacies and this was not repaid under the initial terms (this amount is in the long-term receivables). As a big chunk of this money could not be repaid immediately a much later payment date was arranged with the pharmacies (1 October 2018, I believe).

As these amounts have to be recognised at fair value (taking into account factors influencing probability of repayment as explained in notes 20 and 22) they made a provision in the 2012 accounts tto recognise that these receivables were worth less than the full dollar owing. In the 2013 financial year this was reversed / moved to the assets side of the balance sheet (see note 9) rather than showing as a separate provision on the liabilities side. You can see that $24.784m is still reducing the assets under this note. The balance of the $28.650m (an amount of $3.866m), well this is a mystery to me. I assume it ended up in the current trade debtors provision.

Let me know what you think?

Hmmm....See this is where I get confused. My understanding is that these were guarantees given to other lenders, ie API did not actually lend the money itself rather it guaranteed the loans (that in itself is worth further investigation). So at initiation only the fair value of the guarantee, not the total amount guaranteed is recognised. Once it became apparent that API's customer would not be repaying its lender, API provisioned for the full amount guaranteed. During the period this happened...

Upon consideration of the current guarantees outstanding at 31 August 2013 it was determined that it was unlikely that guarantees
would be called in the foreseeable future, so the balance of the financial guarantee provision was reversed and transferred to
the provision for impairment losses in respect of trade and long term receivables associated with the guarantees (refer note 22).

So once it became apparent the guarantee was not going to be called, why the need to transfer the entire amount being guaranteed to provision impairment loss? It should just disappear off the balance sheet shouldn't it?

 

[Ves]

Thanks I didn't think of it along those lines.

I don't really understand why they would guarantee the third party loans of their franchisees, that sounds like a fairly desperate situation?

 

[McLovin]

Thanks I didn't think of it along those lines.

I don't really understand why they would guarantee the third party loans of their franchisees, that sounds like a fairly desperate situation?

My biggest gripe with API and SIP is that they are being run for the benefit of their customers. At a guess, if they are guaranteeing customer loans, it's to keep them off their own books.

Of course, as I have no real idea wtf is going on here, I could be wrong!