Our family had also used the nasal spray product, Sterimar® for our children when they were younger.
The Group had a strong run of revenue and profits growth since FY2015 before they went IPO in FY2018.
5 Year CAGR for revenue and profit after tax increase 11.1% and 6.3% respectively.
The number would have been higher if not for the IPO expenses that they incurred in FY2018 that dragged the numbers down by a little bit.
Still, you can see from the past growth trend and after attending the call myself, I am able to appreciate the business model a lot better than before.
The Group recently released its Q1 FY2020 results which saw a strong double digit growth in both topline and bottomline.
Revenue increased by 16.4% YoY or by S$4.4m mainly due to higher sales of the Specialty Pharma Principals segment from the higher demand in Singapore and Vietnam.
The increase was also complemented by the resurging sales of their dermatology products under Ceradan®, TDF® and Ocean Health® brands as well as medical hypermart that included sales of PPE suits to hospitals and pharmaceuticals.
Across all business segments in all geographical regions, the businesses have registered double digit growth, which is a testament to their strong product performance during the Covid period. Margins have also increased due to the strong mix of product offerings.
Is The Growth Sustainable Post-Covid?
The management were very candid about prospecting life after Covid. While the outbreak does contribute to the increase amount of sales in Q1 FY2020, they think that the trend should continue to increase over time.
One of the initiatives which the Group have taken during Covid is to increase their omni-channel of sales through engaging more digital partnership with the likes of Lazada and Shopee.
While direct sales through B2C is still a small proportion of the overall sales right now, they are optimistic that the e-commerce trend of buying products online getting more popular.
This process might take 1 to 2 years depending on the requirement of each country’s regulatory authority.
The Group remained committed to pay at least 30% of their earnings as dividends as evident in FY2019 where they have doubled their dividends to 1 cent upon strong earnings.
The rest of the retained cash is to conserve for any opportunistic organic and inorganic move through more product offerings, geographical expansion, extension of principal agreements or any M&A.
The company has seen high trading volume in the past week which sees its share price rose to its high of 37 cents on the 1st Jun before retreating to 33 cents on the 5th Jun market closing.
At the current share price of 33 cents, the company is trading at a price to earnings of 11.6x based on the forward twelve months earnings based on the Q1 FY2020 annualised results out of which net cash per share is worth 9 cents/share. That means investors are only paying an ex-cash PER of about 8.4x for its business.
For a growth healthcare play company, I don’t think the valuation is excessive given how much the other healthcare company’s valuation are currently trading in the market.
I’ll do a quick run-down of DCF based on the below scenario. Do take note the few assumptions made below:
– IPO expenses for FY2018 of $0.9m were added back to the EBIT.
– Effective Tax Rate of 17% were used.
– $0.85m were added back to the D&A in FY2019 as it is related to Rights Use of Assets based on IFRS16 adoption.
– CAGR based on 12% over the next 5 years which is within management agenda and long term historical 5 year growth.
– Maintenance Capex to D&A ratio is approximately 0.67x based on historical average except during IPO year.
Assuming the Group warrants a multiple of 15x PER, which is just about right to value a healthcare company, the share price intrinsic value should trend closer to 38 cents, which represents close to 15% upside from the current share price.
If we were to subscribe a slightly higher multiples at 17x PER, the intrinsic value would go higher to 42 cents based on these assumptions.
I’ll try to balance out with some of the potential risks that investors might want to watch out for.
There are currently two principal agreements expiring at the end of this year and the Group is currently engaging for an extension.
Product registrations also typically take at least 1 to 2 years depending on location, with countries such as Indonesia taking longer due to regulation.
With other healthcare companies trading at typically higher valuation, it is also difficult for Hyphens to engage in M&A that might be accretive to their company, given the low valuation the company is trading right now. Hence, a lot of things might be wait and see until they find a suitable acquisition target.
Disclaimer: This article is a collaboration with Hyphens Pharma International to cover the business model and financial aspect of the company. However, all opinions are purely my own unless stated otherwise.
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