PBP: Quietly bringing us the big brand products

Probiotec (ASX:PBP) was founded in 1997 by the Stringer family. It is a contract manufacturing and packing company with clients across the categories of:

• Prescription and Over the Counter Pharmaceuticals

• Vitamins and supplements

• Veterinary products

• Cosmetics

• Food and beverage

• Pet foods and ingredients

They have a diverse client base of over 200, including many large multinationals and household names. These include pharmaceutical companies like Pfizer, GSK, Sanofi and Johnson n Johnson, vitamin firms Blackmores and Swisse, food companies such as Kellogs, Mars and Unilever, cosmetics from L’Oreal Paris and many other well known brands. They distribute these products both domestically and internationally on behalf of their clients.

The company has grown strongly and now boasts revenue of around $200 million. They listed in 2006 and initially the share price ran to $2.50 in 2010. It then collapsed and they spent many years in the doldrums, with the share price falling below 20c but started to rise again in 2015 and have been in an upward trend ever since.

Over the last five years, revenue has been growing at a CAGR of 25%p.a.. EPS has slightly outpaced this at 27% p.a.. They have benefited from the trend towards onshoring and the push from global firms to ‘make where you sell.’ Supply chain logistics as well as cross border risks came to the forefront during the pandemic with inventory management becoming a big issue. To quote the CEO of PWR Holdings, “I’d rather be looking at it than looking for it.”

Last week I wrote an article on PWR Holdings (ASX:PWH)  where I analysed how it met the criteria for a Compounding Quality Screen. Probiotec has also demonstrated compounding growth and has a Quality score of 95, but it does not make the screen.

Stockopedia gives you the ability to Run a stock through a checklist and see exactly why it doesn’t make a particular screen. Under Tools, select “Run through a checklist” and choose the screen of interest.

You can see in the screenshot below that Probiotec only meets 7 of the 15 rules for the Compounding Quality screen. For each rule missed, we can expand on it to see exactly why it missed out.

The biggest weakness for PBP has been its long term ROCE, which has only averaged 7.1% well short of the 18% threshold. It has improved in recent times, reaching 13.9% over the previous 12 months, only just short of the 15% threshold.

Long term operating margins were 7.7%, rising to 9.5% for the trailing twelve months, but both levels are still short of the 10% threshold. A similar narrative plays out for net profit margins of 7% and 7.2% respectively, just short of 8%.

They have been under some margin pressure due to rising input costs including labour, freight and energy. Despite this, they have managed to beat analyst forecasts.

As can be seen, Probiotec is on the path to being a Quality Compounder, but it does not currently reach the high standard required of this particular screen.

An area of concern when analysing PBP is its balance sheet risk. The company is carrying a lot of debt. The Net gearing ratio is 82% and this flows through to a Bankruptcy Risk on the border of Distress and Cautious.

Further, when the debt is analysed we see that the bank debt of $48 million matures in the next 12 months. A lot of this debt stems from the expansion by acquisitions. They have made a number of acquisitions including the purchase of contract packer Multipack-LJM for $52.5 million in 2020.

This also impacts their free cash flow resulting in a long-term free cash flow to assets ratio of only 2.5%, well short of the threshold in the above screen of 8%.

In May the share price lept 20% on the back of an article in the Australian Financial Review which asserted that the company was the subject of acquisition interest from private equity groups. The company declined to make any public comment on the speculation and have not released any related announcements.

About 20% of the share register is held by the founding Stringer family. They are also heavily involved in the running of the company with Wesley Stringer the CEO and Jared Stringer the CFO. As such they would most likely be able to block any acquisition attempt if they chose to do so.

Probiotec’s StockRank of 95 is primarily supported by its Momentum and Quality scores. The Momentum score is high due to the steadily increasing share price as well as constant level of forecast earnings over the last three months. (Note: it is only covered by two analysts.)

The Value score is lower, but still above average. This of course has been dampened by the rising price. The TTM dividend yield is 2.4% fully franked.

Overall, Probiotec is an interesting company that is profitable and growing. The risks include its small size, high levels of capex and significant debt burden. Given those risk factors, investors would need to consider how much they are willing to pay to access the potential upside.

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