There are two types of Priceline operations. Priceline stores...

There are two types of Priceline operations. Priceline stores are not pharmacies but mini Discount Department stores operating in the same space as Kmart, Target and Big W with no pharmaceuticals, prescriptions or pharmacists. I am not sure but I think these are predominately owned by Api but I guess they could franchised to anyone. Therefore in my mind a company store, but not a pharmacy.

Priceline Pharmacy is the same type of front shop, with a pharmacy component and owned by a pharmacist. Api collects a franchise fee and earns on distribution and other benefits, but doesn't own the store.

In Sydney Cbd according to the store locator, 4/14 pricelines are Priceline stores, 10 are Priceline pharmacies. In Brisbane Cbd 4/5 are Priceline pharmacies, 1/5 are price stores (not pharmacies)

In the announcement, Api continually refer to Priceline and Priceline pharmacy stores, two different types. In part, Api is competing against it's own non-Priceline customers by owning a Priceline store in the front shop, and also it's own franchisees who have Priceline pharmacies. I could be wrong maybe all of the Priceline stores are also franchised but I didn't think so.

Whilst Api doesn't own the pharmacies, they could be responsible for any having a debt guarantee. The other area is if they have extended greater than average credit terms, ie: 3,6,9 months credit, or are delinquent in their accounts. Further, in the past Api also had a financing arm and may have some direct responsibility. I don't know if any of these arrangements are in place. At one stage the rumour was Chemist Warehouse was receiving 12 months credit on paying their accounts by Sigma as their wholesaler, however I understand this has been wound back.

I remember 17 years ago Faulding which is now Symbion guaranteed my loan to the Nab. Without it I couldn't buy a pharmacy. My banker made the comment that the guarantee is only as good as the Faulding business. At the time all of the wholesalers guaranteed almost all customers.

With some of the major owner operators it is conceivable that they could have actually been generating more profit than the major wholesaler behind them giving the skinny profit level of the wholesaler.

If you believe the announcement, the 50 odd million being written as a liability may be written back once the guarantees are no longer in place assuming that it is not called upon. I do not know if there are more guarantees that may come in to the same category as it described certain customers and in the specific renegotiation of their loans. Below, I thought they already did this in 2011 but I could be wrong.

The 40 odd Million retail trade valuation impairment is fairly obvious. Api made claims they were going to grow Priceline to some 550-650 odd stores. The asset of the Priceline business was presumably valued accordingly.

They claim to be 373 up ten from the full year end. I have been posting here for the last 2 years that I don't think that their claims were achievable and assumptions of the resultant growth in business that this would bring should be taken with a grain of salt. I also wonder what percentage of the growth were pre-existing customers.

I believe as pharmacy profit is going through the floor some other groups franchise fees are being reduced, some by up to 50%. It will not be pleasant over the next 3-5 years in pharmacy or any associated industry.

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From the slide presentation of the 2011 Annual reports dejavu perhaps
"Financial Guarantee Impairment Financial guarantee liabilities on balance sheet
• API had issued financial guarantees to Pharmacists with $50m outstanding as at 31 August 2010
• Immaterial history of default rate or banks calling guarantees before exhaustive recovery process undertaken. API considered the amounts contingent liabilities
• Following a review of API’s financial guarantee program it was determined that financial guarantee liabilities would be reported on balance sheet resulting in a $50m pre-tax impairment charge
• API’s financiers issued unconditional waiver to account for the one-off charge"

This looks to me like the same statement.
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From the March 2012 investor presentation
"API significantly undervalued
? Priceline Pharmacy store growth delivers J curve profit growth
? Priceline Pharmacy potential profitability not currently reflected in API’s stock price
? Implied valuation with potential future store network
? Illustration assumes 550 to 650 stores
? Incremental store profitability after tax of $74k per store
? No incremental investment in capital expenditure for store rollout required
? Some increase in working capital expected to support retail trading cycle
? Implied valuation suggests doubling API share price at 600 stores"

320 to 373 is impressive over 3 odd years, but 550 to 650 is overly optimistic in my opinion.
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I am not saying the share price is under or over valued. All of these things may or may not be factored in. I may also be wrong in my summations above. I have not held shares in this sector from 1-2 years, but that doesn't mean it hasn't got value.