New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>AFT Pharmaceuticals<br>1H22 Result&nbsp;— A Bump in the Road</h2>
<p></p>
<h3>RESEARCH&nbsp;INSIGHTS</h3>
<p>AFT Pharmaceuticals (AFT) reported a lower than expected underlying 1H22 result predominately due to COVID-19 related impacts. As expected, overall performance was boosted by the one-off licensing income benefit from its US Maxigesic IV licensing agreement. AFT retained FY22 EBIT guidance (NZ$18–23m) signalling a strong second half skew as COVID-19 restrictions ease. Despite near-term disruption (which we view as largely temporary) there remains a significant growth runway ahead and we view AFT as well positioned to capitalise on it. We expect the share price to remain news flow driven in the near-term, which we anticipate will be positively skewed.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/242/744/original/image_4743969551637287918098.png?1637287919" class="editor-image img-responsive" data-smartkarma-image-id="242744"></figure>
<div>
<h3>What's changed?</h3>
</div>
<div>
<ul>
<li><strong>Earnings</strong>:&nbsp;FY22 EBIT down -10% reflecting lower Australia revenue growth. Minimal changes are made thereafter (EBIT down ~-2%). DPS forecasts are unchanged.</li>
</ul>
</div>
<div>
<h3>COVID-19 remains a handbrake, but there is light at the end of the tunnel</h3>
</div>
<div id="m_6539476629591491101ibyjj">
<p>AFT reported 1H22 EBIT of NZ$5.5m (which was boosted by the one-off licensing income benefit of ~NZ$4m from its US&nbsp;Maxigesic&nbsp;IV deal). Key features of the 1H22 result include;</p>
<ul>
<li><strong>Divisional performance</strong>:&nbsp;Revenue growth was strong in New Zealand (+15%), while&nbsp;COVID-19 disruptions had a material impact on&nbsp;Australia and Rest of World (ROW). In these markets,&nbsp;product sales revenue was up +2% and down -36% respectively, both below our expectations. However, we view these issues as largely temporary and they should begin to alleviate in 2H22.</li>
<li><strong>Gross margins proving resilient following a tough FY21</strong>:&nbsp;A key positive&nbsp;was underlying 1H22 gross margins, excluding licensing income&nbsp;(43.4%), which expanded on the 42.7% in 2H21 and were significantly ahead of the 41.4% reported in 1H21&nbsp;.</li>
<li><strong>Net debt progression puts a dividend on the horizon</strong>:&nbsp;1H22&nbsp;saw net debt levels reduce to NZ$32.6m versus NZ$35.2m at FY21. Prior dividend policy comments were reiterated, with&nbsp;AFT to assess a dividend as debt reduces&nbsp;to its target of NZ$25–30m. Our forecasts assume a dividend commencing in FY23E (starting payout ratio of ~30%).</li>
</ul>
</div>
<div>
<h3>Looking ahead;&nbsp;we expect a strong second half skew</h3>
</div>
<div id="m_6539476629591491101izs5w">
<p>AFT retained FY22 EBIT guidance of NZ$18–23m&nbsp;despite elevated freight costs and COVID-19 disruptions through the period. As a result, guidance implies a strong 2H skew (EBIT of ~NZ$15m, up ~+80% vs 2H21). We forecast AFT to be slightly below the mid-point&nbsp;(NZ$19.4m versus midpoint of NZ$20.5m). Our forecasts assume; (1) an acceleration in the revenue pathway in 2H, particularly in Australia and ROW, both of which were below our expectations in 1H, and (2) modest underlying gross margin improvements reflecting an alleviation in freight cost pressures and greater sales mix skew towards OTC products (its highest margin product).&nbsp;</p>
</div>

AFT Pharmaceuticals 1H22 Result&nbsp;— A Bump in the Road

RESEARCH&nbsp;INSIGHTS
AFT Pharmaceuticals (AFT) reported a lower than expected underlying 1H22 result predominately due to COVID-19 related impacts. As expected, overall performance was boosted by the one-off licensing income benefit from its US Maxigesic IV licensing agreement. AFT retained FY22 EBIT guidance (NZ$18–23m) signalling a strong second half skew as COVID-19 restrictions ease. Despite near-term disruption (which we view as largely temporary) there remains a significant growth runway ahead and we view AFT as well positioned to capitalise on it. We expect the share price to remain news flow driven in the near-term, which we anticipate will be positively skewed.


What's changed?



Earnings:&nbsp;FY22 EBIT down -10% reflecting lower Australia revenue growth. Minimal changes are made thereafter (EBIT down ~-2%). DPS forecasts are unchanged.



COVID-19 remains a handbrake, but there is light at the end of the tunnel


AFT reported 1H22 EBIT of NZ$5.5m (which was boosted by the one-off licensing income benefit of ~NZ$4m from its US&nbsp;Maxigesic&nbsp;IV deal). Key features of the 1H22 result include;

Divisional performance:&nbsp;Revenue growth was strong in New Zealand (+15%), while&nbsp;COVID-19 disruptions had a material impact on&nbsp;Australia and Rest of World (ROW). In these markets,&nbsp;product sales revenue was up +2% and down -36% respectively, both below our expectations. However, we view these issues as largely temporary and they should begin to alleviate in 2H22.
Gross margins proving resilient following a tough FY21:&nbsp;A key positive&nbsp;was underlying 1H22 gross margins, excluding licensing income&nbsp;(43.4%), which expanded on the 42.7% in 2H21 and were significantly ahead of the 41.4% reported in 1H21&nbsp;.
Net debt progression puts a dividend on the horizon:&nbsp;1H22&nbsp;saw net debt levels reduce to NZ$32.6m versus NZ$35.2m at FY21. Prior dividend policy comments were reiterated, with&nbsp;AFT to assess a dividend as debt reduces&nbsp;to its target of NZ$25–30m. Our forecasts assume a dividend commencing in FY23E (starting payout ratio of ~30%).



Looking ahead;&nbsp;we expect a strong second half skew


AFT retained FY22 EBIT guidance of NZ$18–23m&nbsp;despite elevated freight costs and COVID-19 disruptions through the period. As a result, guidance implies a strong 2H skew (EBIT of ~NZ$15m, up ~+80% vs 2H21). We forecast AFT to be slightly below the mid-point&nbsp;(NZ$19.4m versus midpoint of NZ$20.5m). Our forecasts assume; (1) an acceleration in the revenue pathway in 2H, particularly in Australia and ROW, both of which were below our expectations in 1H, and (2) modest underlying gross margin improvements reflecting an alleviation in freight cost pressures and greater sales mix skew towards OTC products (its highest margin product).&nbsp;


AFT Pharmaceuticals: 1H22 Result — A Bump in the Road