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AFT Pharmaceuticals (NZX:AFT & ASX:AFP) Quick Research

After a heafty increase from making a $2.4m loss to a profit (NPAT) of $12.7m, I decided that AFT were worth a quick look.

Upon first look we see a company with a Market Capitalization (MC) of $424m against an NPAT of $12.7m, growing NPAT by $15.1m in the last year. Similar growth the following year would give an MC / NPAT ratio of (424 / [15.1 + 12.7]) ~15 – pretty impressive and definitely worth a look.

However, upon delving deeper into the accounts, I see that they’ve added the value of recently gained control over the Pascomer dermatological medicine Intellectual Property (IP) to their profits, which is a non-cash, non-reoccurring gain of $9.8m. I have mixed feelings about whether accounting for this as part of NPAT is appropriate for the purpose of working out the value in the company vs MC. On one hand, the value of the IP is value that’s been added to the company. On the other hand, how that value is derived is questionable. Possibly more importantly, if we are to work out return per $ invested in the MC, the value of the IP will not be returned to shareholders directly.

In any case, as this is $9.8m that won’t be in next year’s NPAT, I’ll choose to ignore it as part of my research into whether there’s value in the current share price.

Looking forward, this company seems like it has a lot going on:

  • Very steady growth of revenue
  • Recently broke even (even without the value of IP)
  • Has done a $10m Capital Raise (CR)
  • Has expanded it’s distribution channels with growing presence abroad
  • Is launching new products such as hand sanitizers

The downside for me is the NPAT growth. There’s no certainty that costs won’t inflate as they roll out new distribution channels, especially abroad. This could drop NPAT. If we optimistically assume that growth will remain as good as it was in the last reporting period, that would see NPAT increase by $5.3m pa ($12.7 – [-$2.4] – $9.8 for the non-reoccurring IP).

This would give a forward ratio of 40 (424 / [5.3 * 2]). As growth seems to be historically linear, it’s difficult to apply a high PE ratio to such a stock. Perhaps a more appropriate approach would be to work out a 5 year investment period return. Assuming (a potentially unrealistic) growth in NPAT of $5.3 pa, that would give a ratio of 16 (424 / [5.3 * 5]) after 5 years. Not very exciting.

To see value in AFT Pharmaceuticals, an investor would have to be of the belief that new growth initiatives will be very successful and that there would be correspondingly significant growth compared to previous years.

Personally I feel there are better opportunities elsewhere and am disinclined to invest in this stage / type of growth story at this price. For me to consider investing, I would rather pay no more than 3 times NPAT with a multiple of 20 (5% ROI after 3 years, with future growth to enjoy) = MC of $318m at most.

*Note: Regular readers will notice that I didn’t reduce the MC by the cash in the bank before dividing by NPAT. This is because my research into AFT was very brief, and I’m working on the assumption that the recent CR despite profitability means that they plan to use up all the money.

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ASX NZX

AFT Pharmaceuticals Ltd (NZX:AFT & ASX:AFP)