The last time ASX-listed Australian Pharmaceutical Industries Ltd. (API) (ASX: API) traded at today's prices was before the global financial crisis. Currently boasting a market capitalisation of around $800 million and trading around $1.63, API came down slightly from a high of $1.91. However, it was trading as low as $0.49 only 12 months ago. Try that for a return, even in the overinflated, but dearly loved Australian housing market.
API is primarily a wholesale distributor of pharmaceuticals, reporting annual revenues of $3.3 billion during its last annual general meeting (AGM) in January 2015. This represents revenue growth of 5.7%, with gross profit up 6.8% to $430 million. What is more, in its most recent announcement on 4 March, for the first half of 2015, API revised net profit after tax (NPAT) upwards to a minimum of $21.1 million, stating strong trading in January and February as the reasons. The final number will be confirmed in today's half-year financial results briefing. Compare that half-year profit to the full FY2013 profit of $24.3 million and you can see why the share price rebounded.
Dividends as of last year came in at 3.5 cents per share. Store numbers for its flagship retail chain, Priceline, continue to grow. Last year, API increased store numbers by 27 to about a 400-store network as of start of 2015, with 20 more to come by May 2015.
Why has API's share price fortune turned?
One way to tackle low margins is to implement operational improvements to make the business leaner. To improve its back office systems and functions, API has spent $42 million so far on a SAP enterprise resource planning system – a widely used software platform to manage operational and financial aspects of business. This may have something to do with the turnaround, but there is no clear measure.
Although API is a late starter to the online retail presence, opening its online shop late September 2012, online growth numbers are growing strongly. Shop visitations are up 100.3% and sales are up 182.6% according to the 2014 AGM.
Last but not least, what may have supported the turnaround in fortune is the strong focus on growing the Sister Club membership of retail chain Priceline. This store loyalty program continues to grow, currently boasting 4.7 million members, up almost 10% from last year. In January 2014, during the AGM, CEO Stephen Roche stated that Sister Club members spend on average about 50% more than non-members. Whichever way you look at it, this number is promising.
On the downside, API's wholesale business continues to be low margin. Over the last nine years, the ratio of earnings before interest and tax to revenue averaged about 1.3%. Further, although API has stated it is not expecting further adverse changes to the Pharmaceutical Benefits Scheme — a government scheme that controls medicine subsidies – any such change, will likely put downward pressure on API's revenues.
API's flagship retail chain Priceline is a leading health and beauty brand in Australia. If API can maintain a steady store number growth, coupled with continuous year-over-year revenue growth per store, it should provide a strong head wind for the wholesale business to profit from increasing store and online presence. The large selection of beauty products coupled with a pharmacy in the same store, draws a variety of customers in.
Foolish takeaway
There is little doubt that API is turning itself around and the positive NPAT announcements are a testament to that. The market gave API the cold shoulder for a long while, but as of the last 12 months the almost 400% share price growth reversed all that.
There should be no expectation that API will be able to continue high share price growth; it could even cool down for a while, as the market has warmed up to it very nicely. But what we could expect is steady growth. And while that has not happened yet — the dividend didn't grow with the turn of fortunes — the time may have come for the dividends to follow.
