The Motley Fool

This emerging growth business looks too cheap

Sometimes change, or something new within an existing organisation, can drive an improving outlook for a firm and accelerate returns for the company’s investors.

A company under transition

I reckon Quantum Pharma (LSE: QP) is poised to behave in the way I describe above as the firm transitions to a more focused and simplified business strategy led by a new board of directors.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

The company develops and manufactures niche pharmaceutical products for the retail, wholesale, hospital and home care markets, and full-year results out today show revenue up 28% compared to a year ago, suggesting that the firm continues to gain market share.

City analysts following the firm expect pre-tax profit to shoot up 15% for the year to January 2018 and 17% the year after that, an impressive rate of growth. Yet at the current share price around 44p, Quantum Pharma trades on a forward price-to-earnings (P/E) ratio of just over 10 for year to January 2018.

I think that rating undervalues the firm, given its potential, and a re-rating upwards to a higher P/E ratio could materialise if the directors’ transition plan works out as anticipated.

A clean sweep

It arrived on the FTSE AIM market during December 2014, but during 2016 recruited a new chief executive, finance director, non-executive chairman and several non-executive directors in a move that swept away the old board and ushered in a new strategy.

A placing during October raised £15m before expenses and bolstered the strength of the balance sheet, and the new directors closed a lossmaking division at the end of the year, which has since gone into administration. The new chief executive, Chris Rigg, explains in in today’s report that the firm has achieved a “step change in the profitability of the Niche pharmaceuticals division in the second half by focusing on launching and commercialising products where we have a competitive advantage.”

On top of that, the company says it renewed exclusive contracts with three of the four main wholesale and pharmacy chains in the UK and reduced operating costs. Meanwhile, net debt at the year-end came in lower than the directors expected at £13m, which looks manageable at around half the level of gross profit.

With improved profitability and a narrower focus on a simplified array of niche product lines, the outlook for future growth is good. A rejuvenated Quantum Pharma looks poised to rise phoenix-like from the ashes of the old.

Why are the shares cheap?

The company has been through a complicated transformation process during 2016 and events could have muddied the water making it hard to see what’s going on in the business. The placing raised the share count, so there is a decline forecast for earnings per share for the year to January 2018.

It’s only by looking at forecast figures for pre-tax profits that we can see the underlying progress that City analysts think the firm will make. I think the emerging growth we are seeing with Quantum Pharma is worth more than the forward P/E of 10 or so that the market assigns to the company because next year’s forecast for growth in earnings per share is around 14%.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.