Description

ALAPIS / ALAPIS GA

Current Price (10/13/09):  EUR0.65, Price Target:  EUR1.10

Business Overview

Alapis is a Greek manufacturer of pharmaceuticals and para-pharmaceutical products, veterinary pharmaceuticals, cosmetics, detergents, and organic products mainly for the Greek but to some degree south-eastern European markets. The company operates two segments, Health and Non-Health. The Health segment (91% of sales, 98% of EBITDA) offers prescribed medicines, OTC drugs, veterinary products. The Non Health segment (9% of sales, 2% of EBITDA) makes and markets detergents, cosmetics, and nutritional supplements.

Investment Thesis

Alapis nearly controls the Greek pharmaceuticals market, where it operates a one-stop shop. All branded generic drugs that are sold in Greece have to go through intermediaries such as Alapis. The company has by far the largest and best trained sales-force. The company is slated for a number of years of strong growth given its increasing focus on medical devices (diabetes and renal care), and veterinary products, both of which have  much lower penetration n Greece than other European markets. Alapis has launched about 150 products so far this year and has additional 170 products in the pipeline, and is therefore likely to grow by 10-15% in the coming years, with EBITDA margins above 30% . Despite its unique franchise and superior growth prospects, the company trades at 4,3 times forward earnings, or over 60% discount to peers.

This discount can be explained by Alapis’ recent origins: the company is the aggregation of four entities in recent years, and has a short capital market history - which creates an attractive opportunity. Further, investors are still digesting a recent secondary offering of EUR451.1 million in September (with proceeds used to pay-down short-term debt and continue to consolidate the Greek and Eastern European markets).  The main Shareholder (Lamba Partners, a private equity fund) fully subscribed to the offering, and top management has recently added to their holdings.

Valuation

The company is trading at P/E levels that are 50-60% lower than other companies within the sector

Given the company’s built-in growth prospects, benign competitive landscape and accretive acquisitions, we believe the stock should trade in line with peer group multiples of 10-11x earnings, implying over 100% upside potential from current levels.

Key risks / concerns

·         Greek companies operating in their home market face very difficult working capital issues, with long DSO. The hospitals have previously been slow to pay the company, but given Alapis’ position as a key supplier, we expect working capital conditions to improve going forward.

·         Small clients / pharmacies with inadequate financing access may cease operations

·         Investors are concerned about intentions of the main shareholder, though the latter has participated in the rights issue and views his holdings as financial in nature.

Catalyst

Accretive acquisition (over next 12 months)

Greek State hostpitals payment of outstanding invoices (over next 2 quarters)

US roadshow (next month)