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Barbican asset management

Taking Stock-Caps Holdings reverses last year’s loss

Introduction CAPS Holdings Ltd (Caps) recorded a strong recovery during the first half which saw it reversing its performance from the loss of the previous year to

a multi-billion dollar profit in historic terms.





The pharmaceutical giant Caps, is an international group that is involved in the procurement, manufacturing and distribution of pharmaceuticals, veterinary and consumer products.


Its manufacturing division is comprised of two organs, which are Caps rallies and Autosterile while Geddes is the group’s distribution wing.


The prestigious QV Pharmacies serve as the holding company’s trading wing.


The company that is regional boasts of two subsidiaries located outside Zimbabwe and these are Caps Pharmaceuticals (South Africa) and Caps Trading Botswana.


Shareholder structure


As of December 31 2002 the group’s four main shareholders were Old Mutual Life Assurance, Audway Investments, NSSA and Fredex Financial Services, which holds 25,5%, 24,6%, 9% and 7,6% respectively.


The top 10 shareholders hold about 87% stake in the group and an interesting feature is the presence of serious institutional investors such as Old Mutual and NSSA. This shows the level of confidence that the investing heavyweights have on the counter both now and in the future.


Stock market performance


Caps Holdings Ltd’s share has been quiet at the beginning of the year where it was trading at prices as low as $12.

However, it has since shown some signs of upward potential and as a result, achieving an all-time high of $250.


Most analysts are quite optimistic about the counter’s potential and they see the current price as an understatement of the counter’s intrinsic value.


Financial performance


The group has recorded a strong set of results for the year, more or less in line with our market expectations.


After a spate of losses last year, the turnaround strategy, which made the group once more profitable, were least expected.


Turnover grew up by 286% to $10 billion against $2,6 billion the same time last year. This was in the background of shrinking domestic market as inflation continues to squeeze people’s disposable income.


Both profit before interest and tax together with the after tax profit improved significantly from losses last year to $4,2 billion and $2,7 billion respectively.

As a result the group’s attributable earnings surged by 436% to $2 billion surpassing both the official inflation figures and last year-end’s results.


However perpetual increase in input costs due to inflation have placed the group’s margins under tremendous pressure.


The company’s risk profile has improved dramatically following related improvements in gearing from a consolidated 240% to an overall 4%.

According to the board of directors operating cash generation and the resulted positive balance in its cashflow statements drove this turnaround.

The company’s balance sheet showed a marked growth of around 200%, which resulted in its total base ending at $13 billion, compared to slightly over $4 billion last year.


Strengths


The company has a wide export base since its products have a ready market regionally and internationally. With the indications that the group has sufficient forex to meet the next six months’ needs, the group is now well-positioned and the resultant export earnings will go a long way towards overall company profit. The foreign subsidiaries in the company’s portfolio are also contributing positively to total group’s earnings.


The group is fully integrated since it manufactures, distributes and sell its products through its own outlets.


Challenges


The major challenge the group is facing is the high and ever-increasing costs of procuring foreign currency.


The group imports most of its inputs and, therefore, has to source forex all the time and with exchange rates on the parallel market becoming too punitive its margins are affected negatively.


More so the local market is shrinking daily as most people are no longer affording pharmaceutical products as inflation has eaten into their disposable income.


As a result it has to come up with cheap versions for the local market or increasing its export both of which will eat into the company’s margins.


The fuel, coal and electricity crises in the country have also contributed towards the company’s woes and if they are not resolved in time, they will continue to be a cause for concern.


Going forward


Good interim results may mark the beginning a new era in the company’s history.


In its report the company’s board said all the subsidiaries traded profitably for the first time and this may be just preparing us for a more impressive second half.


“The company capacity utilisation shall continue to improve as necessary funding has now been secured,” said the chairman in the report that accompanied the interim results.


We expect its focus towards exports to be more fruitful for the company as it tries to reduce exposure to the ever-shrinking domestic market.


Valuations


The group achieved a tremendous growth in its earnings during the first half. If this growth path is sustained we forecast a future earnings per share of $18.


Based on the earnings growth we further forecast a future P/E of 11.64x compared to the counter’s historic P/E of 36.02.


Conclusion


The counter has a lot of growth potential which can sustain the current appreciation in its share price.

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