Rating Update: Stock Rating C-High Neutral (12/6/19)-Kamada Ltd (KMDA).

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BUSINESS

Kamada Ltd. develops, produces, and markets specialty plasma-derived protein therapeutics. It operates through two segments, Proprietary Products and Distribution. The company offers respiratory products, including Glassia for use in augmentation and maintenance therapy in adults with emphysema due to congenital Alpha-1 Antitrypsin deficiency (AATD). It also provides immunoglobulin products that comprise KamRAB for prophylaxis of rabies disease; KamRho (D) IM to treat prophylaxis of hemolytic disease of newborns; KamRho(D)IV for immune thermobocytopunic purpura; and snake bite antiserum to treat snake bites by the vipera palaestinae and echis coloratus.
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INVESTMENT RATING

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With future capital returns forecasted to be above the cost of capital, KMDA is expected to continue to be a major Value Builder.

Kamada has a current Value Trend Rating of C (High Neutral).
The Value Trend Rating reflects contradictory signals from PTR’s two proprietary measures of a stock’s attractiveness. Kamada has a good Appreciation Score of 79 but a slightly negative Power Rating of 39, producing the High Neutral Value Trend Rating.

Kamada’s stock is selling well below targeted value. The current stock price of $7.37 compares to targeted value 12 months forward of $14.
This high appreciation potential results in an appreciation score of 79 (only 21% of the universe has greater appreciation potential.)
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Kamada has a Power Rating of 39. (This slightly negative Power Rating indicates that Kamada’s chances of enjoying favorable investment performance over the near to intermediate term are only average.)
Factors contributing to this slightly negative Power Rating include: is currently in an unfavorable positi; and earnings estimate behavior for Kamada has been slightly negative recently. An offsetting factor is recent price action has been neutral.

INVESTMENT PROFILE

Kamada’s financial strength is high. Financial strength rating is 74.
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Relative to the S&P 500 Composite, Kamada Ltd has both Growth and Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that KMDA is lower risk. Low historical profitability is a relative weakness for Kamada. Kamada’s valuation is moderate: low dividend yield, low P/E ratio, and moderate price/book ratio. KMDA has unusually low market capitalization.

CURRENT SIGNALS

Kamada’s current operations are strong. Return on equity is rising, reflecting: improving asset utilization; widening pretax margins; rising tax keep rate; and rising leverage.

Kamada’s current technical position is very strong. The stock price is in a 1.6 month up move. The stock has appreciated 45.7% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Kamada Ltd (NASDAQ: KMDA) has benefited from meaningful positive changes in investment behavior: positive upside/downside volume developed.
The stock is currently rated C.
On 12/6/19, Kamada Ltd (NASDAQ: KMDA) stock enjoyed a major increase of 19.1%, closing at $18.22. However, trading volume in this advance was below average at 78% of normal. The stock has performed in line with the market over the last nine months and has risen 1.8% during the last week.

CASH FLOW

In 2018, Kamada generated a significant increase in cash of +$7.57 million (+18%). Sources of cash were larger than uses. Cash generated from 2018 EBITDA totalled +$22.80 million. Non-operating sources contributed +$1.42 million (+6% of EBITDA). Cash taxes contributed +$1.96 million (+9% of EBITDA). Re-investment in the business amounted to -$18.15 million (-80% of EBITDA). On a net basis, debt investors pulled out -$1.05 million (-5% of EBITDA) while equity investors supplied +$0.59 million (+3% of EBITDA).
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Kamada’s Non-operating Income, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Kamada Ltd Peer Group. (Since 2016 Non-operating Income, %EBITDA has experienced a very sharp recovery.) In most years, Kamada was in the top quartile and lower quartile. Currently, Kamada is at the upper quartile at +6% of EBITDA (+$1.42 million).

Kamada’s Cash Taxes, %EBITDA experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Kamada Ltd Peer Group. (Since 2016 Cash Taxes, %EBITDA has experienced a very sharp recovery.) In most years, Kamada was in the top quartile. Currently, Kamada is upper quartile at +9% of EBITDA (+$1.96 million).

Kamada’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Kamada Ltd Peer Group. In most years, Kamada was in the top quartile. Currently, Kamada is substantially below median at -80% of EBITDA (-$18.15 million).

Kamada’s Debt Investors, %EBITDA has experienced a very strong overall downtrend over the period. This downtrend was accompanied by stability for the Kamada Ltd Peer Group. (Since 2016 Debt Investors, %EBITDA has accelerated very sharply.) In most years, Kamada was in the top quartile. Currently, Kamada is slightly above median at -5% of EBITDA (-$1.05 million).

Kamada’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Kamada Ltd Peer Group. (Since 2016 Equity Investors, %EBITDA has accelerated very sharply.) In most years, Kamada was in the top quartile. Currently, Kamada is above median at +3% of EBITDA (+$0.59 million).

Kamada’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Kamada Ltd Peer Group. (Since 2013 Change in Cash, %EBITDA has accelerated very sharply.) In most years, Kamada was in the top quartile. Currently, Kamada is above median at +33% of EBITDA (+$7.57 million).
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Kamada’s Cash, %Revenue has suffered a very strong overall downtrend over the period. This downtrend was accompanied by stability for the Kamada Ltd Peer Group. (Since 2013 Cash, %Revenue has accelerated sharply.) In most years, Kamada was in the top quartile. Currently, Kamada is upper quartile at +44%.

PROFITABILITY

Kamada’s return on equity has improved very significantly since 2012 accelerating very sharply after the 2014 level.
This very significant improvement was due to very strong positive trend in pretax operating return supported by small positive trend in non-operating factors.
The productivity of Kamada’s assets rose over the full period 2009-2019: asset turnover has enjoyed a strong overall uptrend.
Reinforcing this trend, pretax margin enjoyed a volatile overall uptrend that accelerated very sharply from the 2014 level.
Non-operating factors (income taxes and financial leverage) had a minor positive influence on return on equity.
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Kamada’s return on equity is upper quartile (26.6%) for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is upper quartile (21.3%) reflecting asset turnover that is substantially above median (0.92X) and upper quartile pretax margin (23.2%).
Tax “keep” rate (income tax management) is upper quartile (104.1%) resulting in after tax return on assets that is upper quartile.
Financial leverage (leverage) is lower quartile (1.20X).

GROWTH RATES

There are no significant differences between Kamada’s longer term growth and growth in recent years.
Kamada’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.

Annual revenue growth has been 5.0% per year.

Total asset growth has been 0.9% per year.

Annual E.P.S. growth has been 91.3% per year.

Equity growth has been 14.6% per year.
No consensus growth rate forecast is available for Kamada.
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Relative to the Kamada Ltd Peer Group, Kamada’s historical growth measures are erratic. E.P.S. growth (91.3%) has been upper quartile. Equity growth (14.6%) has been upper quartile. Revenue growth (5.0%) has been below median. Total asset growth (0.9%) has been lower quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Kamada’s stock price performance has been significantly below market. Between June, 2013 and December, 2019, Kamada’s stock price fell -34%; relative to the market, this was a -66% loss. Significant price moves during the period: 1) September, 2015 – April, 2017: +109%; and 2) February, 2014 – November, 2014: -82%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -1.3% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through October, 2019 of -1.3% is substantially below median relative to Kamada Ltd Peer Group.

Current 5-year total return performance of 4.8% is substantially below median relative to the S&P 500 Composite.
Through October, 2019, with substantially below median current 5-year total return of 4.8% relative to S&P 500 Composite, Kamada’s total return performance is lower quartile relative to Kamada Ltd Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, KMDA’s overall valuation is quite low. The highest factor, the ratio of enterprise value/assets, is at median. Price/equity ratio is below median. Ratio of enterprise value/revenue is lower quartile. Ratio of enterprise value/earnings before interest and taxes is lower quartile. The lowest factor, the price/earnings ratio, is lower quartile.
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Kamada has no value gap compared to the median valuation. For KMDA to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 1.66X to 1.84X. If KMDA’s ratio of enterprise value/revenue were to rise to 1.84X, its stock price would be lower by $1 to $8.
For KMDA to hit lower quartile valuation relative to the Kamada Ltd Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 1.66X to 1.33X. If KMDA’s ratio of enterprise value/revenue were to fall to 1.33X, its stock price would decline by $-1 from the current level of $7.37.

VALUE TARGETS

With future capital returns forecasted to be above the cost of capital, KMDA is expected to continue to be a major Value Builder.
Kamada’s current Price Target of $14 represents a +89% change from the current price of $7.37.
This high appreciation potential results in an appreciation score of 79 (only 21% of the universe has greater appreciation potential.)
Notwithstanding this high Appreciation Score of 79, the moderately low Power Rating of 39 results in an Value Trend Rating of C.
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Kamada’s current Price Target is $14 (+55% from the 2018 Target of $9 and +89% from the 12/06/19 price of $7.37). This dramatic rise in the Target is the result of a +20% increase in the equity base and a +29% increase in the price/equity multiple. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple and the forecasted increase in growth has a very large positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a very large negative impact.
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PTR’s return on equity forecast is 18.3% — above our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2011 and 2018. The current forecast is significantly above the 2016 low of 4%.

PTR’s growth forecast is 10.0% — slightly above our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2011 and 2018. The current forecast is significantly below the 2014 peak of 23%.

PTR’s cost of equity forecast is 8.6% — slightly above recent levels. Forecasted cost of equity erratic but little changed between 2011 and 2018. The current forecast is above the 2011 low of 4.6%.
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At Kamada’s current price of $7.37, investors are placing a positive value of $1 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 5.0% per year, and a return on equity of 12.3% versus a cost of equity of 5.7%.
PTR’s 2020 Price Target of $14 is based on these forecasts and reflects an estimated value of existing assets of $8 and a value of future investments of $6.

About John Lafferty 83343 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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