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Date : 30/12/2022

Probiotec (ASX: PBP) Is A Perfect Reopening Play

Probiotec (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.

The company provides contract manufacturing services for solid dose tablets, capsules, tablets coating, blister packing, liquids, creams, gels, ointments, powders and sprays, as well as manufacturing and packaging finished doses. It also offers analytical and stability testing services, new product formulation and production trials, and packaging options for human and animal nutrition products. It also manufactures and exports a range of nutraceuticals and functional ingredient raw materials.

Probiotec Limited owns six manufacturing facilities in Australia, and it manufactures products on behalf of a range of clients, including some international pharmaceutical companies. It has a large list of clients, but some of the more familiar names amongst them are Blackmores, Swisse, Pfizer, Loreal Paris, Asahi, Bega and Lavazza. Probiotec Limited was founded in 1997 and is headquartered in Melbourne, Australia.

Probiotec is a perfect reopening play

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

The encouraging results were achieved as Australia, as well as most of the world, put the pandemic behind them in the second half of FY22. This saw demand across Probiotec’s products, especially in the key areas of pharmaceutical manufacturing and packing to return strongly. the company saw demand for the cough, cold and flue categories to recover to above pre-pandemic levels. Demand for the pain, analgesic and antihistamine categories also returned to above historical levels.

Probiotec Limited 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, and that is why it is a perfect reopening play.

Many of the Covid-related challenges will continue to unwind in the rest of FY23

Labour shortages in Australia that were magnified during the COVID by border closures are now easing. Probiotec Limited saw labour availability and cost pressures negatively impacting its operations and profitability during the pandemic, but with the borders now open and international workers entering the country again, labour-related issues are expected to continue to ease throughout FY23.

Supply chain disruptions were another result of the pandemic that impacted materials availability and reliability for the company. The company has seen these issues lessening during the first half of FY23, and it expects the improvement to continue in the second half of FY23.

General costs of freight, inflation impacts and energy costs that impacted the business are also expected to subside through FY23. Probiotec 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

On 28 November 2022, Probiotec finalized and announced its plan for site consolidation across its NSW facilities. Four of Probiotec’s manufacturing facilities are in NSW and the other two are in Victoria. Now the company has planned to consolidate its NSW facilities in a large and purpose-built facility to reduce overhead costs, remove duplication of products, simplify logistics and increase efficiency and capacity to meet increasing customer demands.

Probiotec 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. Probiotec Limited 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.

PBP ASX stock is attractively valued

Probiotec has not provided an FY23 earnings guidance, but it said that it expects 1HY23 revenue and EBITDA in a range of $100m to $105m and $15.5m to $16.5m, respectively. The PBP stock is covered by two analysts, and they expect FY23 earnings per share of 17 cents, almost unchanged from FY22 results, and then increasing to 20 cents and 23 cents in FY24 and FY25.

Given that Probiotec Limited made an EBITDA of $8.4m in 1HY22 and the company’s 1HY23 EBITDA guidance range of $15.5m to $16.5m, the consensus analysts’ estimate of unchanged FY23 earnings per share might prove too conservative. But even with the flat earnings growth, the PBP share price is trading at an FY23 P/E multiple of only 12.8x. With higher earnings expected for the following years, the PBP share price does not look expensive at all, in our opinion.

Probiotec’s dividend payout is set to continue to increase

Probiotec Limited has continuously increased its dividend payout in the last seven years, from 1.5 cents in 2016 to 5.5 cents in 2022, representing a compounded annual growth rate (CAGR) of 14.3%. The following bar chart shows the changes in the company’s earnings per share (EPS) and dividends per share (DPS) over this period.

probiotec asx pbp historical eps and dps

Based on the trend in the company’s dividends payouts and the recent jump in the company’s earnings and the company’s solid cash balance, we estimate an FY23 dividends payout of at least 6 cents per ASX PBP share, giving an 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 ASX PBP dividend payouts.

How to play Probiotec’s stock?

Probiotec Limited has many of the characteristics we like to see in a stock. 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.

The Probiotec 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, expected to be reached in the next 8 months when the company reports its FY23 results.

We think the Probiotec share price (ASX PBP) can see $3.00 and higher levels 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.

Probiotec, Daily Chart in Semi-log Scale
Source: Metastock


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