Should I buy penny share Alliance Pharma?

After a 27% one-year share price rise, penny share Alliance Pharma is almost a pound one. Should I add it to my ISA portfolio?

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Alliance Pharma (LSE: APH) is a small company whose stock trades for pennies. It is a penny share. But only just. After a 27% one-year rise, the Alliance Pharma share price is at 95p and has gotten my attention. It’s time to decide if this penny share is something I want to hold in my Stocks and Shares ISA.

Alliance states its expertise is in the marketing and regulatory management of its products. The company’s products fit into two groups, consumer healthcare and prescription medicines, but are predominantly gained through acquisitions rather than in-house research and development.

Managing a portfolio of brands with expertise has delivered success. Alliance more than doubled its sales between 2015 and 2019. The Alliance share price was 33p at the start of 2015 but finished 2019 at 87p.

Obviously, 2020 was a tricky year for any company, but how did Alliance fare?

Coronavirus impact

The pandemic brought mixed fortunes for Alliance. On the one hand, its consumer healthcare division reported revenues of £85.3m for 2020, bettering the £83.7m of sales recorded in 2019. On the other, prescription medicine revenues slipped from £51.9m to £44.5m for 2020 due to routine medical appointments being delayed and cancelled during the pandemic.

Profits before tax slipped 58% from 2019 to 2020. However, a good chunk of that resulted from acquisition costs and non-cash impairment and amortisation charges — more on that latter. Alliance paid its shareholders a total of 1.61p per share in dividends in 2020, compared to 0.54p in 2019.

Expectations for 2021 are positive. Management reports 2021 has started well and sees a further rebound in sales for the year. This, together with the recent acquisition of Biogix, and its flagship Amberen brand, should help drive revenues back above 2019 levels.

Would I buy this penny share?

So could this penny share become a pound one in 2021? Possibly. The Alliance share price has been over £1 before. That was back in the summer of 2018. Interim results for that year, published in September, crashed the share price back down to 66p. Investors did not like the reorganisation of Chinese operations, which included a £2.5m write-down of a business line and a 35% slump in earnings per share for the period.

But assuming the world does get back to at least near normality in 2021, a positive half-yearly report might be enough to turn Alliance from a penny to a pound share. Although its price-to-earnings (P/E) ratio looks pricey at 65, I can see that Alliance does offer higher average revenue growth and higher margins than other personal care companies, as shown in the table below.

Name Market cap Revenue growth over five years Operating margin (trailing 12 months) Net Profit Margin (five-year average) P/E Ratio (trailing 12 months)
PZ Cussons £1.14bn -6.44% 5.64% 6.45% 49.87
Unilever £108.6bn -0.98% 16.41% 12.83% 22.53
Reckitt Benckiser £48.5bn 9.54% 15.43% 7.08% 42.63
Alliance Pharmaceuticals £509.98m 21.84% 12.57% 16.87% 65.14

Source: FT equity market screener

But, growth is boosted by acquisitions, which can result in later write-downs. Alliance has decided to write off prescription medicine and other brands assets over 20 years. If they were all going off-patent within 20 years, that would make sense, but I see no mention of patents in the annual report. Without a patent, I am not convinced of the value of a brand of a prescription drug.

At the moment, I am neutral on Alliance. I need to do more digging and I will watch this penny share from the sidelines for the time being. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James J. McCombie owns shares of PZ Cussons and Unilever. The Motley Fool UK has recommended Alliance Pharma, PZ Cussons, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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