South Africa

The good and bad about Aspen

Aspen’s annual results, released last month, revealed sales growth was below expectations, but earnings beat estimates as management prioritised cost savings.

Aspen is a multinational South African pharmaceutical company founded in 1850 and the largest drug company in Africa.

Its revenue as of 2022 stems mostly from trading commercial generic drugs and, to a lesser degree, from producing drugs.

PSG Wealth’s recommendation on Aspen is a hold because of its limited growth and no clear way to keep competitors out.

In-house Covid vaccines are a short-term growth catalyst for Aspen, but the upside is limited as demand dwindles.

“Following the recent partnership with Serum Institute, we see the manufacturing division as a key catalyst for Aspen going forward,” PSG Wealth said.

“However, this is a low-margin business as contracts are mainly with governments, which tend to offer poor pricing.”

Aspen also has no clear moat as the company focuses mainly on generics, with limited pricing power.

Aspen results

Aspen is cheap on a valuation basis

On a forward price-to-earnings (P/E) basis, Aspen trades at a 12.7% discount to its long-term average of 10.6 times and a 21.9% discount to its peers.

However, the company’s dividend yield of 2.5% is ahead of its historical average but below its peer average.

There is a good reason for its relatively low P/E ratio. The value creation spread (ROIC/WACC) has been declining over the past ten years, implying that management has destroyed value in the past.

“We have not seen any evidence to indicate this will change,” PSG Wealth said.

There are also downside risks, including Aspen’s inability to fill spare Sterile capacity, poorly managed mergers and acquisitions, and not delivering on cost savings.

“Although it has reduced debt, the business is still heavily regulated with single exit prices,” PSG Wealth said.

Considering all these factors, PSG Wealth found that Aspen has a potential upside of 6.6% to their estimated weighted intrinsic value of R149.

“Thus, we recommend a hold positioning,” it said.

Intrinsic value analysis