Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Summary

  • The only pure global player in animal health and mineral nutrition.
  • High cost of debt allows for boost to bottom line if Phibro cuts its leverage.
  • Yet reported earnings are inflated on the back of non-sustainable tax benefits.

Phibro Animal Health (NASDAQ:PAHC) made its public debut on Friday, April 11. Shares of the animal health and mineral nutrition company rose by 13.3% on their opening day.

The company is a well-established player, having a dominant position in the world market. While the high cost of leverage allows for decent profit improvements going forward, the recently reported tax benefits are not sustainable. As shares appear to be somewhat fairly valued, I decided to stay on the sidelines.

The Public Offering

Phibro Animal Health has been around for nearly 40 years, providing livestock producers with products and solutions benefiting the health and productivity of animals.

The company sells more than 1,100 products to roughly 2,850 customers across 65 countries. Phibro focuses on a wide range of animals including poultry, swine, beef and dairy cattle.

Phibro Animal Health sold 11.8 million shares for $15 a piece, thereby raising $176.5 million in gross proceeds. 7.35 million shares were offered by the company itself, which thereby raised $110 million in gross proceeds, while the remainder of shares were being offered by selling shareholders.

Initially bankers and the firm set an initial price range of $16-$18 per share. Shares did eventually sell below the low end of the preliminary public price range, indicating some weakness. Fortunately for participating shareholders, shares quickly recovered on their opening day, showing a nice little pop.

Some 34% of the total shares outstanding were offered in the public offering. At Friday's closing price of $17 per share, the firm is valued at $661 million.

The major banks that brought the company public were Bank of America/Merrill Lynch, Morgan Stanley and Barclays.

Valuation

Phibro Animal Health operates in a global growth market. Research firm Venosis projects that the global livestock animal health market will grow at a compounded annual rate of 6% between 2012 and 2017. Note that the global livestock animal health sector totaled $13.3 billion in 2012, roughly 60% of the global animal health medicines and vaccines market.

Phibro believes it is the only global company which exclusively focuses on animals for human consumption with key products like Stafac, Nicarb and OmniGen AF being well known and having great brand loyalty.

For the year ending on the 30th of June of 2013, Phibro generated revenues of $653.2 million, down by 0.1% on the year before. A $7.0 million tax benefit spurred net income which came in at $24.9 million that year.

Revenue growth was restored for the six months leading up to December of last year. Revenues came in at $335.0 million for the six month period, up 2.7% on the year before. Earnings came in at $8.1 million, down from $14.7 million in the comparable period a year earlier which included a $5.5 million tax benefit.

The company operates with roughly $30 million in cash and equivalents before the offering took place, while holding nearly $364 million in debt on its books. Even when factoring in the net proceeds from the offering, Phibro will operate with a sizable net debt position which is estimated around $230 million.

The current market capitalization of around $660 million values the business at 26 times last year's earnings which included sizable tax benefits as mentioned before.

Investment Thesis

As noted above, the offering of Phibro has essentially been a non-event. The company priced the offering at $15 per share, an 11.8% discount compared to the preliminary offering range. Following the nice jump upwards on the first trading day, shares are trading at the midpoint of the preliminary offering range.

While Phibro has diversified businesses across the globe, and it focuses on three major business units such as animal health, mineral nutrition and performance products, some big risks remain. This includes the pressure to restrict the use of antibiotics, animal diseases, possible requirements for FDA approval for future products and medication, as well as consolidation across customers which diminishes the pricing power of Phibro.

Phibro has not announced a dividend, yet the company aims to pay out some $15 million per annum to its shareholders, which would translate into a gross dividend of roughly $0.40 per share given the current outstanding share base.

Note that Phibro is paying a high cost on its debt as interest payments totaled nearly $36 million last year. This effectively comes down to a 10% effective interest rate. As such, the proceeds of the public offering which are estimated around $100 million after costs can make a meaningful dent to the bottom line. Unfortunately reported earnings for 2013 appear not sustainable given the tax benefits reported by the firm, which results in still a rather steep valuation. Future accruing cash flows could be used to reduce leverage further, or to refinance debt which could continue to provide a meaningful boost to the bottom line.

All in all I can only conclude that shares are somewhat reasonably valued, not being able to spot a compelling short or long opportunity at current levels. I will stay on the sidelines for now, but keep an eye on the stock.

Source: Phibro Animal Health: Non-Eventful Public Offering For This Global Niche Player