Aspen on Steinhoff path?

10 March 2019 - 05:10 By PENELOPE MASHEGO

Pharmaceutical tycoon Stephen Saad is losing the battle to ward off comparisons between Aspen Pharmacare, the company he founded 21 years ago, and Steinhoff International, whose collapse last year was the biggest corporate failure in SA's history.
On Friday, the shares of the Durban-based drugs manufacturer plunged as much as 51% as investors stewed over its plans to rein in debts that have ballooned over the course of an aggressive acquisition strategy.
The company has expanded into 56 markets over its two-decades long existence.
Aspen's debtstands at R53.5bn, more than its R45.7bn market capitalisation.
At the height of the Steinhoff crisis early last year, Saad was likened by some analysts to Steinhoff's infamous former CEO Markus Jooste - as a CEO who thought he walked on water.
Markets have become less patient with companies like Aspen that use debt to grow, and they have come under significant scrutiny in the wake of the Jooste scandal.
"People are kind of worried ... after Steinhoff everybody is really skittish," said Asief Mohamed, chief investment officer at Aeon Investment Management.
Though Aeon holds shares in Aspen, Mohamed approached the company's plans to deal with its debt issues with caution.
"One doesn't actually know how accurate that is. I wouldn't say I don't trust that, I'm just saying, you never know . management is always trying to give a good spin on these things," Mohamed said.
Aspen plans to reduce its debt load through the sale of its infant nutrition business to French-based dairy company Lactalis Group, for more than R10bn. The deal was announced in September.
Mohamed said the fact that the sale, initially set to be concluded at the end of December, was taking so long could spell trouble.
"If by the end of June they don't sell it, they might at that point in time have to consider a rights issue," he said.
Aspen's interim results to end-December were released after trade on Thursday, with the market reacting only a day later to its earnings report, which coincided with Saad's presentation to investors.
Just minutes into his presentation, Aspen's shares started their collapse and by the end of trade, the stock was trading at R100.21, a 29% fall to its lowest level since February 2012.
From its January 2015 peak, the company's stock is just over 77% lower.
On Aspen's poor share price performance over the past four years, Saad said in an interview with Business Times that it either underreacts or overreacts depending on how Aspen deals with some "big issues".
"The big issue is you bet one way and the share price is right; you bet the other way and it is wrong."
"I do have sympathy for where people are, but when we bought South African Druggists . people said 'this is when the mouse swallowed the elephant'. I knew I had a plan in my head," said Saad, who owns about 8.5% of Aspen.
Aspen acquired South African Druggists in 1999, in a deal that would epitomise an acquisitive strategy that has made the company Africa's largest drug manufacturer.
Stavros Nicolau, senior executive for strategic trade and development at Aspen, said growing a global business required debt. "I would expect this type of reaction [share price collapse] if we were not generating cash flows, we still generate R1bn a month in cash flow," he said.
Despite positive cash flows, Aspen reported a 9% fall in headline earnings to R3.6bn and only a 1% rise in revenues to R19.7bn.
In the more than 20 years he had been in business, Saad said, the market tended at first to be wary of any strategy, but it often got interested after it started to yield results
"Our strategy is, yes, we'll reduce the debt and we'll take two years to get it to what I deem acceptable, after the [nutrition business is sold] it will be an acceptable level. So our strategy is really no different to what we've done before."
After Steinhoff's collapse last year because of fraud and other accounting irregularities, the US-based short seller Viceroy was said to be targeting other blue-chip SA companies that had expanded as fast as the Jooste-led firm on the back of debt.
Aspen was mooted as a potential target, but the research firm ended up targeting Stellenbosch-based Capitec.
As part of Aspen's journey to claw back some of its lost credibility in what has been a difficult year, Aspen this week announced changes to its board with the appointment of Kumba Iron Ore CEO Themba Mkhwanazi and former Standard Bank joint CEO Ben Kruger as independent nonexecutive directors.
This comes on the back of Aspen's strategic review of its local and European operations, a focus to dispose of some of its non-core assets to deleverage its balance sheet.

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