Alliance Pharma Share Price (APH)

Tend to agree with you both. The market hates uncertainty and is trying to price in a lot at the moment. As ever, it will over estimate to the downside in lieu of facts about what’s going on. Hopefully the new CEO knows what he’s about and has also run the rule of the company before taking it on so he knows what he’s up against. As soon as the closed period ends he could buy some shares himself which would help restore confidence in the short term, and then just publish the results! Better to get all the bad news public quickly so as to tie it to your predecessor…

Wow that was clearly on a very different level from what I can mange

FYI, KPMGs resignation letter as auditor in 2022, and the company's response to it is below. Relates to the accounting treatment of the CMA fine, ie the £8m provision made in 2021 accounts, and KPMGs view of the process by which the Board signed off on this treatment. Despite these concerns they still signed off on the 2021 accounts, as Deloitte did on the 2022 accounts. FWIW I don't really care about accounting treatment of the CMA fine, my base case is they eventually have to pay the £8m in full plus some CMA costs of £1-2m. Anything less is upside. Again me saying this doesn't preclude some other issues, technical or otherwise, with the delayed 2023 accounts...

https://www.alliancepharmaceuticals.com/media/gdgnqciv/circular-080822.pdf

For me the main risk is weak trading and more downgrades, but I hope them pointing to Jan trading update as recently as yesterday means this is not the case currently. I don't think the board / Numis Deutsche / Investec (blue chips in small cap world) would let them mislead on this point.

I should say - those EBIT multiples I gave are EV/adj EBIT multiples.

Even if no profit growth for next three years (v unlikely in my view), and if it only rerates to 8x EV/EBIT (v conservative in my view vs peers), I see c.80% upside at least from here simply as the business should reduce net debt to about £30m by 2026 even after paying the fine as interest costs will come down as debt reduces.

£41.5m EBIT x8 = £330m EV, less £30m net debt in 2026 = £300m mcap vs £165m today, ie 80% upside over 2-3 years. Excellent risk vs reward imho.

In reality (assuming nothing more nefarious in the accounts - which is a known risk) I think they will return to growth in 2025, reinstate divi and rerate to something more in line with historic rating of c.10x, so think my target above is pretty conservative in terms of both timing and share price. Also opportunity for further M&A which I think on the balance will lead to upgrades and be positive for the story.

Good post. A few additional points:

+ve. They've repeatedly pointed to their Jan trading update saying everything in it remains valid, ie: 2023 inline with cons ie £183m rev, £45m adj EBITDA, £41.5m adj EBIT, and net debt £92.4m, so leverage 2.05x EBITDA . AND importantly for 2024, revenue growth (ie £185-190m?) and flat profit ie £45m EBITDA and £41.5m EBIT.

-ve. CMA investigation. They've been found guilty (in 2022) and have provided for £8m fine but not paid it as they appealed, which was heard Aug 2023, no decision yet. I've looked at the CMA decision document (CMA website) and seems more likely than not that the appeal will not succeed so they will have to pay the fine. Personally I think this is already 'in the price'.

+ve. Balance sheet looks fine. Net debt £92.4m at y/e, should be lower now. Business is v cash generative, capex c.£2m, interest £9-10m so post tax should generate about £25m FCF (ie 45m EBITDA - 2m capex -10 interest) less 25% tax. Maybe a bit less due to working capital investment for growth (£2-3m?) and a few exceptionals (£2m?), it should generate £20m FCF. Even if they have to pay the fine plus costs (say £10m) net debt should reduce by about £10m this year to £80-85m. Note covenants are 3x leverage vs adj EBITDA (2x currently) and 4x net interest vs adj EBITDA (4.5x to 5.0x currently).

-ve. CEO has left. My take is it was related to the above - he was likely to be disqualified from being a director if the appeal failed. Think its probably on balance positive that the Board (which has been refreshed and looks high quality) is being proactive to have a new CEO in place before the appeal ruling.

??. Accounts delayed. Don't know why, seems many companies have had this happen this year. But delayed 4 times is very poor, especially with no reasons given. We know though that Deliotte was appointed 2022 and signed off 2022 accounts when all the CMA issues already existed and when debt was higher and profit lower. I think uncertainty the delayed results have caused is main reason for SP being where it is.

+ve. DBAY biggest shareholder at 20%. Good track record, and potentially could take it private. I also note Apax were sniffing around with a rumoured 70p bid early last year. No TR1s yet to see if any changes.

Overall I'm bullish at this price, I think this is a decent business that has built up a portfolio of quality global consumer healthcare brands, has demonstrated a consistent / predictable revenue profile and good cash generation. Consumer health businesses should trade on 10-15x EBIT (Reckitt on about 11.5x, Haleon on about 14.5x); Alliance can be had for c.6x EBIT, and after the fine has been paid it will throw off cash, degear rapidly and reinstate divis.

Obvious risk is that something more nefarious is going on with the accounts so understand those who want to sit it out. For me the main risk is weak trading and more downgrades, but I hope them pointing to Jan trading update