We are confident that while FY2021 has had a slow start, business has been largely stable for the past nine months at Pharma-Bio Serv, Inc. (OTC:PBSV).
The pandemic disrupted manufacturing and development of products across industries (including pharmaceuticals). For Pharma-Bio Serv, this disruption means a delay in new consulting project starts, leading to a gap in what is normally a consistent, moderate-growth top line. At the same time, the pandemic has raised concerns over the reliability of the supply chain, leading manufacturers to consider relocating some capacity closer to home. In our view, Puerto Rico and Pharma-Bio Serv, will ultimately benefit from these trends.
Pharma-Bio Serv has a well-established business model serving an industry with complex, specific needs. New contracts are generally won through a competitive bid process and generally go to companies with an established reputation for delivering high quality, reliable and timely solutions.
Quarterly revenues have held in the $5.0 million range for the past four quarters. Revenues for the three and nine months ended July 31, were approximately $5.0 million and $14.5 million, down from $6.3 million and $16.5 million in the year earlier periods. The decline was largely concentrated in Puerto Rico, and to a lesser extent in the continental US; however, business was up $0.2 million (87%) in Europe.
Gross profit margins declined 430bp in the July quarter to 25.2% from 29.5% in the year earlier period due largely to the end of a high-margin long-term contract in Puerto Rico. Long-term, we model gross margins in the 30-31% range, although contracts outside Puerto Rico can be more profitable in some cases. Project staffing is the Company’s primary expense and is largely variable, so margin expansion will come primarily through leveraging SG&A.
Net income for the three and nine months ended July 31 totaled $2.3 million and $2.8 million compared to $0.7 million and $1.9 million in the same periods last year. Net income for the July 31 reported periods includes of $2.0 million in PPP loan forgiveness.
At July 31, the Company had $16.5 million in cash on its balance sheet. On September 24, the Company resumed its share repurchase program, of which 1.7 million shares were still authorized for repurchase. With the shares trading at book value, and modest capital expense and working investment needs, we view this as a reasonable action.
The Company has emphasized organic growth in Puerto Rico and increasingly in other geographies. In addition, the Company looks to provide GMP services outside its core pharmaceutical client base, such as food, cosmetic and automotive manufacturers. Any additional investments the Company makes in its business and the rate of its expansion will factor significantly in both our forecasts and financial valuation. Our $2.11 target is based on a 10-year DCF with an 18% terminal EBIT margin and an 11% discount rate. The shares trade at book value which we think will continue to be supported by cash flow generation, positive ROI and a renewed repurchase program acting as a floor on the share price.
We believe that after a post-COVID slow start to 2021, Pharma-Bio Serv will build on the strong progress of 2020 over the next three years. With stable profit margins, $16.5 million cash on the balance sheet, regular payouts to shareholders in the past three years yielding over 6% annually, and myriad opportunities to expand their focus beyond pharmaceutical manufacturers, we believe Pharma-Bio Serv is a unique opportunity for value-oriented investors.
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