Our opinion on the current state of ADCOCK(AIP)
Adcock (AIP) is a leading supplier of pharmaceuticals to both the private and public sectors in South Africa, with diversification into India and other sub-Saharan countries. The pharmaceutical industry in South Africa is heavily influenced by the government's "single exit price" (SEP) mechanism, which determines the price for each type of medicine. In 2019, Adcock was only permitted to increase its prices by 1.3% on regulated medicines. This "cost-plus" pricing approach limits the company's ability to generate significant profits by pricing at market rates, and it also makes the company vulnerable to fluctuations in the strength of the rand, particularly since some ingredients are imported.
To secure government contracts for supplying medicines, Adcock has achieved level 1 B-BBEE empowerment status for its continuing operations. Bidvest holds a controlling interest in Adcock (50.1%) and effectively controls its board of directors. Bidvest has been attempting to sell this interest to a Black empowerment entity but has faced challenges, as no potential buyers have sufficient capital to acquire the share for R4.8bn. In response to the constraints imposed by the SEP mechanism, Adcock is exploring diversification into unregulated products, such as baby care products, to reduce its reliance on the regulated pharmaceutical market.
In its results for the year ending 30th June 2024, Adcock reported revenue growth of 6% and headline earnings per share (HEPS) growth of 10%. The company attributed its success to a strong trading performance coupled with excellent cost control, which facilitated double-digit HEPS growth. Additionally, strong cash generation allowed the company to return value to shareholders, including the repurchase of 6 million shares and a 10% increase in dividends.
Technically, the share had been in a long-term downward trend that ended in September 2021. A breakout above the long-term downward trendline occurred on 3rd September 2021 at a price of 4548c, and since then, the share price has risen to 6596c. Given its defensive nature and current valuation, with a P:E ratio of 10.7, Adcock appears to be a solid investment for private investors.
To secure government contracts for supplying medicines, Adcock has achieved level 1 B-BBEE empowerment status for its continuing operations. Bidvest holds a controlling interest in Adcock (50.1%) and effectively controls its board of directors. Bidvest has been attempting to sell this interest to a Black empowerment entity but has faced challenges, as no potential buyers have sufficient capital to acquire the share for R4.8bn. In response to the constraints imposed by the SEP mechanism, Adcock is exploring diversification into unregulated products, such as baby care products, to reduce its reliance on the regulated pharmaceutical market.
In its results for the year ending 30th June 2024, Adcock reported revenue growth of 6% and headline earnings per share (HEPS) growth of 10%. The company attributed its success to a strong trading performance coupled with excellent cost control, which facilitated double-digit HEPS growth. Additionally, strong cash generation allowed the company to return value to shareholders, including the repurchase of 6 million shares and a 10% increase in dividends.
Technically, the share had been in a long-term downward trend that ended in September 2021. A breakout above the long-term downward trendline occurred on 3rd September 2021 at a price of 4548c, and since then, the share price has risen to 6596c. Given its defensive nature and current valuation, with a P:E ratio of 10.7, Adcock appears to be a solid investment for private investors.
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