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Date : 19/01/2023

Probiotec Limited

ASX :

PBP

Market Cap : $176.47 Million

Dividend Per Share : $0.055

Dividend Yield : 2.53 %

Buy

52 Week Range : $2.02 - $2.42

Share Price : $2.19

A pharmaceutical company with stable cash flows and healthy dividends.

Company Analysis

Probiotech (ASX: PBP) is a manufacturer, packer and distributor of a range of prescription and over-the-counter (OTC) pharmaceuticals, complementary medicines, consumer health products and fast-moving consumer goods.

Probiotech owns six manufacturing facilities in Australia and manufactures products on behalf of a range of clients, including some international pharmaceutical companies. It has a large list of clients. Some of the more familiar names amongst them are Blackmores, Swisse, Pfizer, Asahi, Bega and Lavazza.

Probiotech is a perfect reopening play

The defensive nature of Probiotech’s business helped it to continue growing its business during the pandemic. And the company’s FY22 results saw a substantial increase in revenue and earnings. Its revenue increased by 51% to $182m and its earnings soared by 170% to $13.7m.

The reopening of Australia’s economy saw demand for the company’s cough, cold and flu categories to recover to above pre-pandemic levels. Demand for the pain, analgesic and antihistamine categories also returned to above historical levels. Probiotech believes the increased usage in those categories resulted from higher levels of virus circulating and that its products are being used to treat Covid-related illnesses.

Probiotech has seen labour availability issues and supply chain disruptions start to ease in the first half of FY23, and it expects the improvements to continue in the second half of the year. Probiotech has increased pricing across its entire portfolio to pass on the increased costs to its customers. It expects the price increases to become effective progressively over the next few months and for its margins to return towards historical levels in FY24, after experiencing some contraction in FY23 due to the lag between cost increases and pricing increases becoming effective.

Site consolidation to grow capacity and save costs from 2025

Probiotech has finalized its plan for site consolidation across its four NSW facilities to a large and purpose-built facility in the state to reduce overhead costs and increase efficiency and capacity to meet increasing customer demands. It expects the new site to be fully operational from January 2025 and to deliver cost savings of $3m to $5m per year. The company anticipates capital and operating expenditures of $7m to $10m to prepare the site. Probiotech had $22m cash balance as of 30 June 2022, and it should be able to self-fund the new site’s expenditures while maintaining its regular dividend payouts, in our opinion.

The company also keeps the option open to retain one of its current sites in NSW after the new site is built, if extraordinary growth in packing demand is attained over the next 12 to 18 months.

Probiotech’s dividend payout is set to continue to increase

Based on the company’s revenue and EBITDA guidance for 1HY23, we expect FY23 earnings similar to that of FY22, giving the stock an FY23 P/E multiple of only 12.8x. Probiotech has continuously increased its dividend payout in the last seven years, from 1.5 cents in 2016 to 5.5 cents in 2022. So with the recent jump in earnings and the company’s solid cash balance, we estimate an FY23 dividends payout of at least 6 cents per share, giving to a minimum expected dividend yield of 2.8%.

We understand that a dividend yield of 2.8% does not sound lucrative with the risk-free rate in Australia currently standing at 3.1% and increasing. But this dividend yield is based on an expected dividend payout ratio of only 35%. The company has a high retention ratio as it has many growth opportunities that can create more value for shareholders than giving them cash, leaving plenty of upside potential for its future dividend payouts and share price.

How to play Probiotech’s stock?

Probiotech has many of the characteristics we like to see in a stock in the current macro environment. Its business is defensive in nature, which should help it navigate through the expected economic slowdown in 2023. It pays dividends, and its business is growing with the capacity to substantially increase its dividend payouts and share price.

Probiotech’s share price has spent most of the last two years trading in a range of $2.00 to $2.50. As such, we think prices near the bottom of the range around $2.00 are attractive, with a first target price of $2.50 at the top of the range (the green line on the chart), expected to be reached in the next 8 months when the company reports its FY23 results.

We think Probiotech’s share price can see $3.00 in the next 12 to 18 months, driven by its growing business. The company has frequently cited its customers’ frequent inquiries about localizing their manufacturing in Australia as they seek to avoid being exposed to major supply chain disruptions. Probiotech’s significant available capacity positions it well to benefit from the industry tailwinds.

We see share prices of $4.00 and higher very much possible in the next 2-3 years when the new site becomes operational and makes a significant difference in the company’s earnings. In the meantime, patient investors will be rewarded with regular dividend payouts.

We recommend using the bottom of the range at $2.00 (the red line) as a stop-loss level. A confirmed break below the important support level of $2.00 would indicate a significant bearish sentiment on the stock that can open the way down to lower levels.

 

Probiotech, Weekly Chart in Semi-log Scale (Source: Metastock)

 

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