Litha looks set for a buy in Africa

It’s been an excellent season for investors in Litha, the JSE-listed diversified health play. Now at 415c/share (after pulling off their all-time high of 455c hit last month), stocks in Litha have surged an enviable 62% over the past 12 months. Second only to a red-hot Life, up just south of 70% over this period, this rally makes Litha the best performer across healthcare. The JSE all-share index, in contrast, is up no more than 20%.

Having commanded what now seems like a tiny R700m in market value this time, two years ago, before striking some mega deals (and an empowerment transaction with Nkululeko Sowazi-led Kagiso Tiso), Litha has more than trebled in value. At last count, the healthcare’s market cap sat at R2.3bn – that’s equivalent to education firm AdvTech but considerably smaller than Cipla Medpro, a generic drugs maker.

Last week, Litha released its first quarterly results – in keeping with the requirements of the Toronto bourse, where its new parent, Paladin (with a 44.5% stake), is listed. It’s impractical to assess Litha’s quarterlies given that there was no comparative set of numbers given for the 2011 third quarter to go by. For the quarter ended September 2012, operating profit came in at R12.5m on the back of R240.6m in revenues.

For the full year ended 2011, operating profit at Litha came in 14% higher, at R128m, following a 38% surge in revenues, to R1.3bn, thanks to the inclusion of the then-recently acquired assets. In July, Litha fortified its asset base when it snaffled drugs distribution specialist Pharmaplan, for R590m. This, too, will markedly boost this year’s earnings statement.

Its meteoric rise over time raises the question: is the rally in the Litha stock sustainable, or will the share price soon give in to gravity? That this counter has given up some ground over the past few weeks casts such doubt. Also, an earnings multiple of 20 – miles ahead of Cipla and Netcare’s, for two – implies this play isn’t exactly attractive.

It’s also not inspiring that the market, judging by worryingly low trading volumes, for instance, has ignored a terse cautionary issued on October 1 (further announcements, issued more recently, didn’t go beyond the predictable: “Litha is still in negotiations”). It’s a fact that cautionary announcements tend to give impetus to stocks. However, this theory doesn’t apply at Litha, at least not this time. Investors can’t be too delighted.

But, arguing that the party is long from over for the counter, SA Stockbrokers portfolio manager Ron Klipin cites “profit-taking” for what he labels temporary softness. That said, and despite less-than-impressive interim results presented a few months ago, the Litha stock hasn’t lost its shine for long-term investors.

“There’s been profit-taking. Investors like to bank a little bit of profit sometimes – that’s what’s pulling the share down, but it won’t be long,” he asserts.

Like Klipin, Sasfin’s Gary Poultney hails Litha management – which sealed a deal with Paladin in July – for the local firm’s meteoric rise over the past few years. The Litha board is well-rounded, with Selwyn Kahanovitz, a pharmacist, serving as chief executive officer. His brother, Martin Kahanovitz, a chartered accountant, is chief financial officer.

“I like Michael and Selwyn Kahanovitz,” says Poultney. “I think they have a good business and are developing a unique manufacturing business in Africa.” Klipin agrees, adding that the many deals the top brass has inked will enable the tiny healthcare firm to earn the much-needed critical mass as it prepares to spread its tentacles. In his 2011 CEO’s report, Selwyn Kahanovitz wrote: “We retain our positive outlook for the African market and will continue to progress our cross-border strategy during 2012 and beyond.”

The focus, he wrote, would be on Southern African countries in the short term. In the long-term, the plan would be to expand footprint across sub-Saharan Africa. Statistics from IMS Health show that emerging markets, no less Africa, bode well for healthcare players.

Given this and the company’s growth strategy, Klipin’s prediction that the cautionary and the behind-the-scenes talks – involving Litha and an unnamed party – point to a buy, in Africa – seems a logical conclusion.

“The deal flow is still pretty much in the go,” he says. The touted purchase is supported by the fact that Paladin claims a formidable C$200m (or R1.8bn) war chest. In a previous interview with Finweek, Martin Kahanovitz indicated that some of this money could be used to power the local company’s expansion plans.

The only question then is: are we there yet?

Speak Your Mind