In this briefing:
- Catch-Up Session with Intuch Group
- Sigma Healthcare Market Update: Strategic Review Expects More
- Hansoh Pharma IPO Preview: A Decent Story Tarnished by a Huge Pre-IPO Dividend
- API/Sigma Merger: Sigma’s Hand Strengthens to Improve the Terms of API’s Bid
- CStone Pharma (基石药业) IPO: Thoughts on Valuation (Part 2)
1. Catch-Up Session with Intuch Group
We caught up with Intuch Group this week to check how things were going on with them and their subsidiaries, AIS and Thaicom. It’s good to touch base, since it’s been a while, and many things have changed in the interim:
- Intuch self-congratulated themselves for a narrowing of their discount to NAV from 28% to 20% in 2018 while introducing three new investments and announced the breakeven of their shopping network, a joint venture with Hyundai.
- Wongnai, an online foodie guide and one of Intuch’s largest investments, underperformed our revenue forecast significantly, but managed to post impressive revenue growth nevertheless. While profitable, their rapid expansion also means they are unlikely to meet their own internal profitability expectations.
- Thaicom posted a loss in Q4 and almost non-existent earnings in 2018 largely due to asset impairments, but there is some hope in the future with the government’s various PPP (public-private partnership) schemes mentioned in the meeting.
- AIS, the Group’s flagship company, posted flat earnings of Bt30bn and is in the process of reversing a decline in revenue market share through aggressive push in enterprise and consumer services.
2. Sigma Healthcare Market Update: Strategic Review Expects More
In my first insight on this potential deal situation in December API Tilts at Sigma Healthcare: Expect More, I noted that despite the 69% premium and very large jump on Day1 there was still room below the cash and scrip terms of Australian Pharma Industries (API AU)‘s (“API”) non-binding offer (of 0.31 shares of API and A$0.23 in cash for each share of Sigma Healthcare (SIG AU) held), which were arguably light (i.e. ascribed too much value to API shareholders for the shares portion). Also, given the nature of “opportunistic bids” made when a recently bombed out former growth stock and the “sunk cost” model of investor and executive mentality, there was every possibility that Sigma would come out saying they were worth more.
My concluding recommendation was to expect that API would have to bid more, and to think about trading this from a “long gamma” perspective and said I would be long Sigma vs API in the interim (either long-short or against terms). So far that has worked, but mostly because Australian Pharma Industries (API AU) has fallen in price. What had been a 24.9% spread to terms when I wrote was down to 13.6% last Friday and to 7.6% after the move Monday after the New News.
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The New News
Friday morning, Sigma Healthcare released a 2-page Market Update saying the four month Business Review, assisted by Accenture, had identified A$100mm of annual cost savings, confirmed the FY19 EBIT guidance of A$75 million, and confirmed the FY20 EBITDA guidance of $55-60mm (strictly speaking, the conversion from EBIT to EBITDA had been pinpointed to be $54-64mm, so the range has shrunk and the top end has come down).
The business review sees 10% underlying EBITDA growth from FY20 to FY23 so that after cost savings are included, FY23 sees the same EBITDA as FY19 [i.e. almost A$90mm].
The last bullet point suggests to expect “minimal net debt by FY20” despite an “extensive capital reinvestment program” and “retention of a high dividend payout.” This suggests some use of the capital release from withdrawing from the MC/CW deal to pay down debt.
There is a fair bit one can do to read between the lines. It is worthwhile doing so.
3. Hansoh Pharma IPO Preview: A Decent Story Tarnished by a Huge Pre-IPO Dividend
Hansoh Pharmaceutical (HANSOH HK) claims to be one of the few R&D driven Chinese pharmaceutical companies. According to press reports, Hansoh aims to launch its Hong Kong IPO to raise $1 billion this month. Over the track record period, Hansoh’s financial performance shows accelerating revenue growth, relatively stable margins and solid cash generation.
Hansoh has the elements of a decent growth story, but our optimism is tempered due to mixed prospects for its drugs. Also, the huge pre-IPO dividend of RMB4.0 billion ($0.6 billion) will likely raise questions on the timing and size of the IPO.
4. API/Sigma Merger: Sigma’s Hand Strengthens to Improve the Terms of API’s Bid
Today, Sigma Healthcare (SIG AU) announced the results of its four-month-long strategic review. As a reminder, on 14 December, Australian Pharma Industries (API AU) lobbed an indicative cash-scrip proposal for Sigma. Under the proposal, Sigma’s shareholders would receive 0.31 API shares and A$0.23 cash for each Sigma share.
Sigma said that reciprocal due diligence with API has commenced but the merger “needs to be assessed in the context of what is in the best interests of Sigma shareholders.” We believe that should API continue to pursue the merger; the strategic review strengthens Sigma’s hand to improve the terms of API’s bid.
5. CStone Pharma (基石药业) IPO: Thoughts on Valuation (Part 2)
CStone Pharma, a Wuxi Apptec related biotech company, plans to raise USD 300m to list on the Hong Kong Stock Exchange. In our previous insight (link here), we have discussed CStone’s drug candidate pipeline, founders, management team and investors.
In this insight, we will provide a detailed valuation breakdown for its key products. Our base case post-money valuation for CStone is USD 1.4 bn, which is 30% above its pre-IPO valuation of USD 1.05 bn but at the low end of the guided valuation range.
Our coverage on biotech listing
- CStone Pharma (基石药业) IPO: Strong Assembly and Backing (Part 1)
- Viva Biotech (维亚生物) IPO: When CRO Becomes Early Stage Biotech Investor
- Hansoh Pharma (翰森制药) IPO: Takeaways from Recent 4+7 City Centralized Tender Results
- Hansoh Pharma (翰森制药) IPO: A Leading Generic Player with Regulatory Overhang (Part 1)
- WuXi Apptec (药明康德) IPO: This A+H Listing Will Be Different
- Frontage Holding (方达控股) IPO: More Disclosure Needed to Understand Moat and Growth Prospect
- Ascentage Pharma (亚盛医药) IPO: Too Early for an IPO
- Junshi Bioscience (君实医药) IPO: Thoughts on Valuation (Part 2)
- Junshi Bioscience (君实医药) IPO: Early in Application but Behind in Key Indications (Part 1)
- CanSino Biologics (康希诺) IPO: Promising Pre-Clinical Results but Vaccine Scandal Weighs (Part 1)
- AOBiome Therapeutics IPO: Hope for Natural Therapeutic Treatment
- Innovent Biologics (信达生物) IPO: Pricing the PD-1 and Biosimilars Competition (Part 2)
- Innovent Biologics (信达生物) IPO: A Major PD-1 MAb Competitor Might Have Just Emerged (Part 1)
- MicuRx Pharma (盟科医药) IPO: Betting on Single Drug in the Not so Attractive Antibiotic Segment
- Hua Medicine (华领医药) IPO: Thoughts on Valuation
- Hua Medicine (华领医药) IPO: Reviving Roche’s Failed Attempt?
- BeiGene (百济神州) IPO: Dual-Listing with Upside Capped in the Near Term
- Ascletis Pharma (歌礼制药) IPO: Valuation Not Justified by Ganovo and Ravidasvir NPV (Part 3)
- Ascletis Pharma (歌礼制药) IPO: Three Valuation Risk Factors (Part 2)
- Ascletis Pharma (歌礼制药) IPO: Emerging Player in the Crowded HCV Drug Market
- China Isotope & Radiation IPO: Oligopoly, Visible Growth and High Barrier to Entry
- Zai Lab IPO: Thoughts on Valuation, Risks and Upsides (Part 2)
- Zai Lab IPO: Experienced Team, Promising In-Licensing Drug Pipeline (Part 1)
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