Hikma Pharmaceuticals (LSE: HIK) heads the FTSE 100 fallers board today, following the release of a trading update. Its shares dived as much as 7.5% early doors but have since regained a bit of ground to trade down 4.7% at 1,620p.
In a broader context, the shares were above 2,100p as recently as March and are almost 40% below their 52-week high of 2,676p last summer. Despite the decline and today’s badly-received trading update, I believe now could be the perfect time to buy a slice of the business.
Revenue downgrade
Hikma today reiterated previous full-year revenue guidance for its Injectibles division (“$800m to $825m”) and Branded division (“grow in the low-single digits”, so around $570m). However, it said it now expects revenue from its Generics business to be “around $670m”, compared with previous guidance of “around $800m”.
A revenue downgrade had actually been signposted last week when the company announced that there was now a “low likelihood” of its generic version of GlaxoSmithKline‘s Advair Diskus asthma treatment receiving approval from the US Food and Drug Administration in the current year. The previous revenue guidance of $800m for the Generics division included 15% from new product launches, “primarily generic Advair, which is assumed to be launched in the second half of the year”. So today’s lower guidance of $670m largely reflects the delay to approval, although also some pricing pressure in the US generics market.
Compelling growth story
In my view, you could take generic Advair completely out of the picture and Hikma would still represent a compelling growth story. It currently sells well over 700 products worldwide and has a strong position in the Middle East and North Africa, accounting for about a third of group revenue.
Even without generic Advair, I estimate Hikma trades on a mid-teens price-to-earnings (P/E) ratio for 2018. This seems too generous for a company with excellent medium- and long-term growth prospects. As such, I rate the shares a ‘buy’ at their current level and anticipate them advancing when the market starts looking forward to next year. The advance could be rapid should there be any positive news on generic Advair.
Under-appreciated
Another company whose growth prospects I believe are currently under-appreciated by the market is FTSE 250 infrastructure group Balfour Beatty (LSE: BBY). The company got into all sorts of trouble a few years ago, much of it stemming from an aggressive acquisition strategy over the previous decade. Its shares hit a multi-year low of 152p in October 2015.
However, following sweeping boardroom changes, it has made excellent progress and returned to profit in 2016. It’s now focused on its core markets in the UK and US, where governments are committed to large-scale expenditure on infrastructure.
Set to re-rate
Having done the heavy lifting of simplifying the group, the new management expects to achieve industry-standard profit margins over the next two years and industry-leading performance in the medium term.
The shares have recovered from their 2014 low to 280p but the market is still undervaluing the prospective growth, in my view. A current-year forecast P/E of 22, falls rapidly to 13.6 next year on consensus analyst expectations of a 50% increase in earnings. The shares look very buyable to me on the basis of a re-rating, as market confidence in the company grows.
