2012 half year result, page-20

Hi Micky78,

In your post of last night you've challenged my statements in my previous post and referred me to the article by The Motley Fool, so I guess I need to defend my position.

The subsequent postings by various contributors have already addressed some of the issues you and the Motley Fool article has raised, but let me elaborate my perspective on the other points while also summarising (for compeletness) the points others have covered:

The Motley Fool article on API's HY result seemed to have been based on a very rushed analysis and some notable misinterpretations and miscalculations. My take of the API's result is as follows:

1) Headline PE (at share price of 36c at the time of my previous post) of just over 5, as I previously stated, with the corresponding 'underlying' PE (after taking out insurance payout and allowing for some profit increase for the 2nd half) of just over 7... or 8 at SP of 39c now.

2) With Equity (NAB) of $1.15, API's Debt level is reasonable at Debt/Equity ratio of only 35%.

And the reason API's debt is largely classified under Current Liabilities is that this debt represents the amounts drawn by API against a bank credit facility secured against Current Receivables that fluctuate from month to month. As I understand, API has credit facility amounting to some $350m, of which it seems to use only a fraction. The 1st HY report shows that at the end of Feb 2012 the company had used around 60% of the credit limit the banks have been happy to agree to, which seems typical based on the company's previous results.

With Interest Cover of around 3, I don't see API under any financial stress as The Motley Fool's article implies. And the article's comparison of Debt against Market Capitalisation is ridiculous!

3) Yes, API's margins are low, but as roboshan has stated in his blog the pharmaceutical wholesaling has always been high volume / low margin business. But the volumes in the sector have been fairly resilient and are expected to continue to grow as our population ages. The industry business model and API's in particular, as other blogs have also explained, has been challenged many times in the past but has always been able to come through in tact albeit with some adjustments now and then.

The cash flow situation is not the best, but is reasonable and improving. API's growth in the future will largely come from expansion of store roll-out, which the company plans to almost double in the next few years.

Yes, of course, there are risks, but so are the potential rewards. And in the current environment nearly every industry sector is facing challenges! API management seems to be getting its act together after years of stock underperformance (which has been partly, not entirely, their fault) and the company seems to be on the verge of a sustained turnaround and ongoing growth.

While it is a personal choice whether one would want to invest in this type of stock, IMO there is still strong value to be extracted from investment in API. As newB has also pointed out in his post, several brokers have upgraded their target price on the stock since the HY result, and the Consesnsus recommendation on the stock before the result announcement has been 'Strong Buy'. The Motley's Fool seems to be 'the odd man out'.

I still believe, as I have stated in an earlier post, that the stock should be selling at around 50c/share at present, and should continue to rise from that level as the ongoing performance improvement gets validated at progressive six-monthly results in the future. I am happy to stay long in the stock and enjoy fully franked Div Yld of around 8% as the SP continues to recover...