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Alliance Pharma - once again a buy

By Tom Winnifrith & Steve Moore | Thursday 20 April 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Specialty pharmaceutical company, Alliance Pharma (APH) is a previous successful share tip for us - recommended at 31p, with gains banked at 43p in 2015. However, there has since been positive development which looks inadequately reflected in a current sub 50p offer price and, noting also the continued presence of famed investors Nigel Wray and Slater Investments as major shareholders…

NEW SHARE TIP ON TUESDAY  - the Nifty Fifty website of Tom Winnifrith and Steve Moore, on which this article first appeared, will have a new share tip on Tuesday. To access the website ahead of that and a new shorting piece from Lucian Miers later this week click HERE

Operations: Having joined AIM in 2003, Alliance has developed a strong track record in acquiring and supplying established niche pharmaceutical and consumer healthcare products. It currently owns or licenses the rights to approximately 90 such products, with a bedrock that deliver stable and reliable sales without any significant promotional expenditure as they occupy niche positions and are engrained into prescribing practice. The company has sales in more than 100 countries worldwide via direct sales, joint ventures and a network of distributors and continues to explore opportunities to expand the product portfolio.

Management Incentive: Gaining multi-disciplinary experience in the pharmaceutical industry over thirty years, CEO John Dawson founded the company in 1996. His 2015 remuneration totalled £328,216 (including a £96,680 bonus) and he has 56,576,402 shares in the company.

Following previous significant experience in the pharmaceutical industry, CFO Andrew Franklin joined the company in September 2015 from Panasonic Europe, where he was General Manager – European Tax and Accounting. His 2015 remuneration from the company totalled £56,377 (including a £9,807 bonus) and he has options, but currently no shares. In October it was announced that Peter Butterfield, who joined in 2010, has been appointed Deputy CEO. He has 28,376 shares in the company.

Recent Financials & Trading: Recently announced results for the 2016 calendar year emphasised “we are pleased to report a year of significant progress for the group… we successfully integrated the ex-Sinclair products into Alliance - effectively doubling our size - while at the same time achieving our growth targets”.

This was with positive performances from key international growth products, Kelo-cote (for scar reduction) and MacuShield (nutritional supplement for age-related macular degeneration) – and the accounts showed a pre-tax profit of £22.2 million on revenue of £97.5 million, generating earnings per share of 3.85p, up from a prior year underlying 3.52p.

After particularly tax, a net £6.5 million working capital outflow, £6 million of acquisition payments and £5.2 million of dividends paid, net debt increased by £4.6 million to £76.1 million. However, this position was reduced from £79 million at the half-year stage and is expected to further reduce this year.

The company’s confidence is shown in a proposed increased 0.807p per share full-year dividend (to be paid on 12th July to shareholders on the register on 16th June), taking the dividend per share for 2016 10% higher than for 2015, to 1.21p.

Risks: There is risk from change in the competitive environment – including regulatory action. However, the company has a diverse number of niche products with a steady track-record. There is also supply chain risk, particularly with all manufacturing being outsourced. A number of measures have though been taken to strengthen the supply chain in recent years – including an enhanced supply chain team focusing on sourcing and management of inventory. There is always some risk with acquisitions, but the track-record reassures on this and then also financial risk including debt and currency. However, there is proven underlying cash generation and an international spread of sales exposure.

Valuation: The results statement also noted that “we have greatly expanded the number of territories to which we distribute. Our teams are now exploring opportunities in countries where our brands are not currently sold”“a major growth initiative is the launch of Diclectin to meet the unmet need for an approved treatment of nausea and vomiting of pregnancy. This depends on regulatory approval which is anticipated to be in Q3 2017 for the UK and approximately one year later for our other EU territories” and that “the current year has started well”.

These provide confidence looking ahead – with there currently forecasts for earnings per share to rise to comfortably above 4p this year and towards 5p next and the dividend per share to rise to 1.3p, followed by 1.5p. In the current low interest rate environment, we consider a 2.5% yield more than fair here – suggesting a share price rising to 60p, at which the price/earnings multiple would still be more than reasonable. As such, at up to 53p, we rate the shares a buy.

This article first appeared on the Nifty Fifty website which Tom Winnifrith runs with Steve Moore & Lucian Miers. To access the website ahead of a new shorting piece from Lucian later this week and that tip from Tom & Steve on Tuesday see HERE

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