Australian Pharmaceutical Industries Ltd delivers more growth: Is it a buy?

Is an 18.1% jump in profits enough for investors to buy shares of Australian Pharmaceutical Industries Ltd (ASX:API)?

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Shares of Australian Pharmaceutical Industries Ltd (ASX: API) are trading mostly flat today after the company released its financial results for the half-year ended 29 February 2016.

The owner of the Priceline, Soul Pattinson and Pharmacist Advice brands reported a healthy increase in underlying net profit after tax (NPAT) of $25.3 million.

Other highlights from its results (taking into account the additional day for the leap year this year) include:

  • Revenue increased by 4.4% to $1.79 billion from the prior corresponding period (pcp)
  • Gross profit increased by 4.7% to $237.9 million from the pcp
  • EBIT increased by 15.6% to $44.6 million from the pcp
  • Underlying NPAT increased by 18.1% to $25.3 million from the pcp
  • Negative operating cash flow of $54.8 million.
  • Return on equity (ROE) increased to 9.5%
  • Net debt to equity of 27.3%, up from 14.1% in the pcp
  • Fully franked interim dividend of 2.5 cents per share, an increase of 25% from the pcp

The company has two main operating divisions  – Retail and Pharmacy Distribution.

Retail

Its retail segment, dominated by the Priceline Pharmacy brand, has been the company's primary growth driver over recent years and it continued to perform strongly in the first half. The company added 5 new stores during the first half to a record 425 stores.

Source: Company Presentation
Source: Company Presentation

As the graph above shows, retail sales have been trending up over the last four years and total sales increased by 7.1% in the most recent half. Like-for-like sales increased by 2.4% and overall gross profit increased by 8.2% to $120.9 million.

The Priceline franchise now boasts an impressive 6.1 million loyalty members who represent 42% of the brands total sales.

API expects an additional 15 stores to be added to the network by the end of FY16.

Pharmacy Distribution

Unfortunately for API, its pharmacy distribution segment has been a drag on overall earnings growth over recent years and this trend continued in the first half.

Source: Company Presentation
Source: Company Presentation

Revenue growth in this segment was again anaemic due to ongoing Pharmaceutical Benefits Scheme (PBS) price impacts. Revenues increased by less than 1.6% and gross profit by just 0.86%.

Unfortunately for API and the other pharmaceutical wholesalers including Sigma Pharmaceutical Limited (ASX: SIP), PBS pricing is out of their control and they are becoming increasingly more reliant on over-the counter product volumes to drive growth in this segment.

Outlook

API did not provide any specific earnings guidance for the second half, but it does expect that the current trading performance will continue during the second half of FY16.

Foolish takeaway

API is a story of two halves but this was a pretty solid result overall considering it is operating in an increasingly competitive market. It has done well to keep costs under control, although investors should keep a close eye on debt levels and cash flows as these deteriorated in the first half.

Should you buy it?

Assuming API can earn around $25 million in NPAT in the second half, it is currently trading on a price-to-earnings ratio of 18.5. This is not particularly cheap especially when you consider the headwinds still facing the company in the pharmacy distribution segment.

As a result, I wouldn't be prepared to buy at these levels, but if the share price falls significantly from here then it would definitely become a stock worth a closer look.

Motley Fool contributor Christopher Georges has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Healthcare Shares

A woman jumps for joy with a rocket drawn on the wall behind her.
Healthcare Shares

Guess which ASX healthcare stock is jumping 7% on US FDA approval news

This share is giving its shareholders an early Christmas present.

Read more »

A senior pharmacist talks to a customer at the counter in a shop
Healthcare Shares

Is it too late to buy Sigma shares to cash in on the Chemist Warehouse deal?

Can investors still make healthy returns with this stock?

Read more »

Shot of a scientist using a computer while conducting research in a laboratory.
Healthcare Shares

Why the Mesoblast share price is diving 18% after an FDA win

Investors are sending the Mesoblast share price tumbling on Friday. But why?

Read more »

A happy doctor in a white coat dancing due to his excitement over the EBOS acquisition
Healthcare Shares

Mesoblast share price rockets 30% on big US FDA news

Big news is giving this biotech a huge lift on Thursday.

Read more »

Two scientists in a Rhythm Biosciences lab cheer while looking at results on a computer.
Healthcare Shares

Guess which ASX healthcare stock is jumping 12% on Wednesday

This shares is rocketing this morning. But why? Let's find out.

Read more »

Man holding out Australian dollar notes, symbolising dividends.
Healthcare Shares

Here is the dividend forecast to 2029 for CSL shares

Can this blue-chip giant provide healthy dividend income?

Read more »

a doctor in a white coat makes a heart shape with his hands and holds it over his chest where his heart is placed.
Healthcare Shares

The best ASX 200 healthcare stocks to buy in 2025

These shares could give your portfolio a healthy boost next year according to Bell Potter.

Read more »

In the lab at work, the mature adult woman and young adult man smile as they review the results of their successful experimentation.
Healthcare Shares

ASX 300 healthcare stock lifts off on promising new results

Up 28% in a year, the ASX healthcare stock is leaping higher on Thursday.

Read more »