Swiss Generics Manufacturer Has Strong 1st Half of Year

Siegfried Holdings (SGFEF, Financial) is a Swiss generic drug manufacturer that is undervalued when compared to its peers. Last year, Siegfried purchased BASF’s generic drug division. This hardly made news in the U.S.

There are 4.2 million shares, and the market cap is 878 million Swiss francs ($913 million). It takes $1.04 to buy one Swiss franc. One of Siegfried’s major shareholders is Tweedy Browne.

Sales were up 76.2% for the first half of the year (versus the first half of 2015) to 353.6 million francs. EBITDA, after integrating new units, was up 26.2% to 43.7 million francs. Net income was 14 million francs. Management expects EBITDA for the full year will be 100 million francs and sales 700 million francs. Operating margins were 13.5% and expected to be between 15% and 20% by 2018. The balance sheet is quite strong with 33.7 million francs in cash and 132.650 million francs in accounts receivables to 63.234 million francs in accounts payables and 225.5 million francs in debt.

What’s driving these results was Siegfried’s purchase of BASF’s generic and pharmaceutical ingredients division. Siegfried is working to integrate the three new sites located in Minden (Germany), Evionnaz (Switzerland) and St. Vulbas (France). In 2014, Siegfried commenced work on a location in Nanton, China, and also purchased Hameln, its generic pharmaceutical brand.

I wrote on Siegfried a few weeks ago for GuruFocus and will refresh some facts and views. Siegfried manufactures the actual ingredients used in drugs and also produces pharmaceuticals that have come off patent. The list of drugs is extensive but to give you just a few names: Dopamine, Methadone, Codein, Morphine, Oxycodone, Ketamine and Sertraline.

So let’s do some valuation analysis. At a market cap of 878 million francs, its price-sales (P/S) ratio is 1.25. Its price to EBITDA is 8.78. I could add more comps and ratios, but I’m going to keep it simple. Teva’s (TEVA, Financial) P/S is 2.5 and its price to EBITDA is 14.6. Mallinckrodt’s (MNK, Financial) P/S is 2.6 and price to EBITDA is 18.9. Mylan’s (MYL, Financial) P/S is 2.8 and price to EBITDA is 17.8.

So why is Siegfried so undervalued? Because it’s so underfollowed. There is a dearth of information on Bloomberg or Google News. The BASF division was no big deal to the German chemicals giant but is a big thing to Siegfried. Is Siegfried a buy? Yes. We own shares and are at a small profit. The stock should probably be trading at a P/S ratio of at least 2. That means a 75% rise. Why buy the big American and European pharma companies that have seen their sales reach their zenith? These companies are too large to move the needle. A stock like Siegfried is the way to make a profit.

Disclosure: We own shares in Siegfried Holdings.

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