Probiotec Limited (ASX:PBP) is a leading manufacturer, packer and distributor of a range of prescription and over-the-counter pharmaceuticals, medicines and consumer health products.
PBP (the “Group”) is comprised of three businesses, the parent entity Probiotec, and the subsidiaries being South Pack Laboratories (SPL) and Australian Blister Sealing (ABS).
For the past 4 years, the Group has established a new senior management team who have adopted a new strategy to divest and exit non-core operations. Furthermore, capital has been allocated to growing both organically and through acquisitions within the contract manufacturing areas. Since then, the Group has made a turnaround and is growing rapidly. The rise in return on equity from 5.36% to 8.16% in the past four years proves the quality of new senior management.
Probiotec (the parent entity) services a wide range of large multinational companies, including Pfizer, Proctor & Gamble, Johnson & Johnson and Blackmores. Key customer contracts usually run for 3-5 year terms. In the past 5 years, Probiotec achieved a strong historical contract roll-over rate with no major contracts losses. As a result, Probiotec organically grew at a rate of 20% in FY19.
The Group acquired SPL in FY18 and ABS in FY19, both were acquired at 4-5x EBITDA. The acquisitions increased the Group’s manufacturing capabilities and scales. More importantly, the Group has continued finding attractive acquisitions after the above two. Recently, the Group announced an acquisition of assets from Contract Pharmaceutical Services of Australia Pty Ltd (CPSA). The acquisition is priced at 2x EBITDA, which is extremely inexpensive in the current low-rate environment.
Valuation and Investment Rationale
The company has a strong relationship with customers and is experiencing growth both organically and through acquisition, which in turn represents a 20%+ underlying EBITDA growth rate for the next two years. This gives us an attractive valuation multiple, coupled with the high-quality management team, we believe that the company can continue its growth journey in the long term. At the same time, the Group provides some defensive elements to our portfolio as it operates in the consumer health and medical industry, which is uncorrelated to the general economy. Our valuation for PBP is $3.2.