API – Australian Pharmaceutical Industries

This was from Southern cross around the 10th of mayHEALTHCARE

Australian Pharmaceutical Industries (API)

Reviving with Priceline

A fast-growing health and beauty retailer, with a drug wholesale business that is turning around . Australian Pharmaceutical Industries (API) is a drug wholesaler that also owns several retail operations including Priceline, a health and beauty chain. Priceline dominates the health and beauty category in Australia, and a programme to franchise the brand to retail pharmacists is adding strong growth momentum. API’s wholesale business is recovering after a difficult 2006. We like API’s rising earnings’ profile from FY08, its low level of gearing, and its low capex requirements looking forward. We have initiated coverage with a Buy recommendation and $3.00 price target. We value the stock on a DCF basis at $2.53 per share base case and $3.33 optimistic case.

Priceline is the primary value driver. With health and beauty a strong retail category, and mini-majors the preferred new retail format, Priceline has been able to grow strongly for several years now. We argue in this note that valuation gains related to Priceline have the potential to offset any declines in the intrinsic value of API’s wholesale business.

API is enjoying great success in building its franchised Priceline Pharmacy model. From 68 Priceline Pharmacy franchises in August 2006, there are now 111 franchises, making this one of the fastest growing retail brands in Australia.

API’s wholesale business is slowly recovering a difficult 2006. Anecdotal evidence suggests that better management has helped stabilise the business at higher margins.

Recommendation: Buy Previous Close: $ 2.33 Price Target: $3.00


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