Pact Group

About the author:

Author name:

By Alex Lu

Job title:

Analyst

Date posted:

06 September 2016, 1:53 PM

Sectors Covered:

Industrials

PGH buy Australian Pharmaceutical Manufacturers (APM)

Pact Group (PGH) has entered into an agreement to acquire specialty contract manufacturer, Australian Pharmaceutical Manufacturers (APM) for A$90m. The deal represents an EV/EBITDA multiple of 6.5x and will be funded via debt (A$75m) and share scrip (A$15m). APM is one of the largest manufacturers and packaging providers of nutraceuticals (vitamin and mineral supplements, herbal remedies, amino acids etc) in Australia, with manufacturing facilities located in Keysborough, Victoria.

PGH expects the deal to be EPS accretive in year one and meet its 20% return on investment hurdle by year three. The transaction is expected to close on the 16th September 2016.

Acquisition EPS accretive on our numbers

On our calculations, the acquisition will be 3% EPS accretive in FY17 and 5% accretive in FY18. It also complements PGH's acquisition of Jalco last year in the contract manufacturing space through an expanded service offering and overlapping customer base. We see potential for revenue synergies down the track, however have not incorporated this into our forecasts. 

Given Australia's ageing population and the trend towards health and well-being, we think it is an area that has solid long-term growth potential. The deal also diversifies PGH's revenue away from food, dairy and beverage, which represented 47% of revenue in FY16.

FY17F EBIT upgraded by 5%

After integrating earnings from the APM acquisition FY17F EBIT rises 5% to A$186m and underlying NPAT increases 4% to A$105m. This is based on a nine month contribution from APM to FY17 earnings. However, FY17F underlying EPS grows by only 3% due to the dilutionary impact from part of the acquisition being funded via share issue. FY18F EBIT increases by 6% and FY19F EBIT increases by 7%.

Investment view

PGH is currently trading on 17.8x FY17F PE and a 3.5% yield. While we are attracted to PGH's dominant market positions in Australia and New Zealand, high margins and exposure to the faster-growing rigid plastics market, we see the stock as fairly valued. We see organic growth as limited and overall earnings growth driven largely by acquisitions.

We increase our share price target but maintain our Hold recommendation.

More information

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