FinnCap said that Alliance Pharma (LON:APH) trades at a discount to its peers and a price hike of nearly 30% would bring it in line.
The broker today initiated coverage of the company, giving it a 'buy' recommendation with a price target of 41pence compared to the current 32 pence.
The broker ran a comparison to other UK-listed speciality pharmaceutical companies on profitable ratios in working out the valuation.
Among the bullish points noted in the report were that Alliance is sufficiently cash generative to cover its debt and the low economic risk, as the key products in Alliance’s portfolio of 57 are often the only drugs available for the indication with no generic alternative.
“Consequently we believe the risk of downward price pressure from the Health Service is low,” said finnCap.
The company currently has a debt of £30.6 million and a market cap of £75.4 million.
It was noted that the portfolio of products provides gross margins of over 55% and the low operating cost business model results in operating margins of about 30%.
FinnCap said that company is very operationally geared and additional products and revenue can be added to the business with little increase in operating cost.
Furthermore, there are no projects in the portfolio that require expensive clinical trials and consequently there is no risk of a product failing in development.
Alliance Pharma paid maiden dividends in the last financial year, which finnCap saw as a “demonstration of management’s confidence in the future of the company, and we forecast a progressive growth in the dividend”.
FinnCap is forecasting Alliance Pharma to make £50.3 million in sales revenues in 2010 and £43 million in 2011 compared to £31.2 million.
Earnings before interest, taxes, depreciation and amortisation (EBITDA) are projected to rise from £11.4 million in 2009 to £16.2 million in 2010 and then decline to £12.9 million in 2011.
Late last month, Alliance Pharma increased its banking facilities to £44 million for possible acquisitions.