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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>AFT Pharmaceuticals<br>1H21 Result&nbsp;—Under the Weather</h2>
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<h2>RESEARCH&nbsp;INSIGHTS</h2>
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<p>AFT Pharmaceuticals (AFT) reported 1H21 underlying growth of ~+9%, albeit the result fell short of our expectations as COVID-19 created headwinds across the portfolio (a marked turnaround from 2H20 tailwinds). Despite this, FY21 EBIT guidance was retained, with AFT citing a higher than usual seasonal skew to 2H. We lower our forecasts to the bottom-end of the range, assuming a modest acceleration in the revenue growth trajectory, helped by recent new deals and early signs some headwinds are abating.&nbsp;AFT is pursuing a multitude of growth avenues, and continues to make steady progress with new agreements&nbsp; globally for its products, however COVID-19 challenges means the growth path looks likely to take longer than previously envisaged. Progress with further new agreements, particularly larger markets, remains a key area of focus for us.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/172/777/original/image_48749387021605829859510.png?1605829861" class="editor-image img-responsive" data-smartkarma-image-id="172777"></figure>
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<h3>What's changed?</h3>
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<div id="m_-2337232968976908965iphfh">
<ul>
<li><strong>Earnings revisions</strong>:&nbsp;Material near-term downgrades, reflecting more conservative revenue growth assumptions across all markets.</li>
</ul>
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<h3>COVID-19; a handbrake on the 1H21 result</h3>
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<div id="m_-2337232968976908965igk3o">
<p>AFT reported 1H21&nbsp;EBIT of NZ$2.4m, down -38%,&nbsp;or up +9%&nbsp;when adjusting for one-offs. Product sales growth was strong (+9%), albeit weaker than we anticipated,&nbsp;mainly due to COVID-19 related challenges&nbsp;across all segments. Notable features in 1H21 include:</p>
</div>
<div id="m_-2337232968976908965i93eif">
<ul>
<li><strong>Divisional revenue&nbsp;a mixed bag</strong>:&nbsp;Revenue growth was strong in Australia (+11%), albeit weaker than we forecast, while New&nbsp;Zealand&nbsp;was surprisingly weak (revenue flat), with weakness in Prescriptions outweighing strength in the Hospital channel. Product sales were strong in Rest of World (+57%), reflecting continued progress in a number of markets, however minimal licence income during the period&nbsp;(a typically lumpy inflow)&nbsp;weighed on overall growth.</li>
<li><strong>SG&amp;A cost discipline offset gross margin pressure</strong>:&nbsp;Underlying EBIT margins were broadly stable, with lower SG&amp;A costs outweighing a -380bp contraction in gross margins (due to lower licence income and higher freight costs).</li>
<li><strong>Inventory build weighed on&nbsp;cashflow</strong>:&nbsp;Inventory levels were materially higher than expected, as AFT&nbsp;lifted ‘safety stock’ levels. While not surprising given recent feedback on various challenges in the global supply chain, it materially weighed on&nbsp;cashflow.</li>
</ul>
</div>
<div>
<h3>Unpacking FY21 guidance and our expectations</h3>
</div>
<div id="m_-2337232968976908965iq3n3l">
<p>AFT retained FY21 EBIT guidance of NZ$14-18m, +23-58%. The weaker than forecast 1H21 raises the question, is this still achievable?&nbsp;&nbsp;It appears challenging, even considering the typical seasonal skew to 2H. The plethora of moving parts within AFT’s portfolio of products (and potential for further new agreements, including large markets where upfront fees are material) means the range of feasible outcomes is wide, only amplified by COVID-19. We forecast AFT to be at the bottom-end of its FY21 guidance range, which assumes a moderate acceleration in the revenue growth trajectory in 2H21 and stronger period of licensing revenue (2H skew this year). This assumes some COVID-19 pressures ease, and is helped by recent progress with new products into Australasia and a number of small licensing agreements — although this is likely to be more meaningful in FY22 given the typical time lag.</p>
</div>
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<div><strong>Chelsea Leadbetter CFA</strong></div>
<div><a href="mailto:chelsea.leadbetter@forsythbarr.co.nz" target="_blank" rel="noopener">chelsea.leadbetter@<wbr>forsythbarr.co.nz</a></div>
<div>+64 4 495 5262</div>
<div></div>
</div>
</div>
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<div><strong>Matt Montgomerie</strong></div>
<div><a href="mailto:matt.montgomerie@forsythbarr.co.nz" target="_blank" rel="noopener">matt.montgomerie@forsythbarr.<wbr>co.nz</a></div>
<div>+64 9 368 0124</div>
</div>
</div>
<p><br><br></p>

AFT Pharmaceuticals 1H21 Result&nbsp;—Under the Weather


RESEARCH&nbsp;INSIGHTS

AFT Pharmaceuticals (AFT) reported 1H21 underlying growth of ~+9%, albeit the result fell short of our expectations as COVID-19 created headwinds across the portfolio (a marked turnaround from 2H20 tailwinds). Despite this, FY21 EBIT guidance was retained, with AFT citing a higher than usual seasonal skew to 2H. We lower our forecasts to the bottom-end of the range, assuming a modest acceleration in the revenue growth trajectory, helped by recent new deals and early signs some headwinds are abating.&nbsp;AFT is pursuing a multitude of growth avenues, and continues to make steady progress with new agreements&nbsp; globally for its products, however COVID-19 challenges means the growth path looks likely to take longer than previously envisaged. Progress with further new agreements, particularly larger markets, remains a key area of focus for us.


What's changed?



Earnings revisions:&nbsp;Material near-term downgrades, reflecting more conservative revenue growth assumptions across all markets.



COVID-19; a handbrake on the 1H21 result


AFT reported 1H21&nbsp;EBIT of NZ$2.4m, down -38%,&nbsp;or up +9%&nbsp;when adjusting for one-offs. Product sales growth was strong (+9%), albeit weaker than we anticipated,&nbsp;mainly due to COVID-19 related challenges&nbsp;across all segments. Notable features in 1H21 include:



Divisional revenue&nbsp;a mixed bag:&nbsp;Revenue growth was strong in Australia (+11%), albeit weaker than we forecast, while New&nbsp;Zealand&nbsp;was surprisingly weak (revenue flat), with weakness in Prescriptions outweighing strength in the Hospital channel. Product sales were strong in Rest of World (+57%), reflecting continued progress in a number of markets, however minimal licence income during the period&nbsp;(a typically lumpy inflow)&nbsp;weighed on overall growth.
SG&amp;A cost discipline offset gross margin pressure:&nbsp;Underlying EBIT margins were broadly stable, with lower SG&amp;A costs outweighing a -380bp contraction in gross margins (due to lower licence income and higher freight costs).
Inventory build weighed on&nbsp;cashflow:&nbsp;Inventory levels were materially higher than expected, as AFT&nbsp;lifted ‘safety stock’ levels. While not surprising given recent feedback on various challenges in the global supply chain, it materially weighed on&nbsp;cashflow.



Unpacking FY21 guidance and our expectations


AFT retained FY21 EBIT guidance of NZ$14-18m, +23-58%. The weaker than forecast 1H21 raises the question, is this still achievable?&nbsp;&nbsp;It appears challenging, even considering the typical seasonal skew to 2H. The plethora of moving parts within AFT’s portfolio of products (and potential for further new agreements, including large markets where upfront fees are material) means the range of feasible outcomes is wide, only amplified by COVID-19. We forecast AFT to be at the bottom-end of its FY21 guidance range, which assumes a moderate acceleration in the revenue growth trajectory in 2H21 and stronger period of licensing revenue (2H skew this year). This assumes some COVID-19 pressures ease, and is helped by recent progress with new products into Australasia and a number of small licensing agreements — although this is likely to be more meaningful in FY22 given the typical time lag.



Chelsea Leadbetter CFA
chelsea.leadbetter@forsythbarr.co.nz
+64 4 495 5262





Matt Montgomerie
matt.montgomerie@forsythbarr.co.nz
+64 9 368 0124


  

AFT Pharmaceuticals: 1H21 Result —Under the Weather