We reinstate coverage on ARBP with buy and target price of R425 (46% upside).
Over the past five years, ARBP has transformed from an API (active pharmaceutical ingredient) company to a formulation maker, but its valuations have yet to catch up (trading at 47% discount to peers). We are 11/15% above consensus for FY14/15E.
We see the re-rating of ARBP being realised by evidence of earnings growth being driven by success in the US, B/S improvement, induction of professional management and clear signs of the scale improving margin.
Historically the stock was de-rated due to an FDA import alert on unit IV in FY11, a profit miss, earnings cut by street and over leveraged B/S.
Following the FDA resolution, the firm scaled up its US business rapidly, which has seen higher market share in existing products and new launches. Driven by a large pipeline and incremental focus on differentiated products, we expect US business to grow FY13-16E revenue by a 34% CAGR and +580bps in margin. With the investment cycle behind us, increased capacity utilization and a favorable product mix, we expect profitability to improve.