PBSV: Lowering target; still a solid value

By Beth Senko, CFA

OTC:PBSV

READ THE FULL PBSV RESEARCH REPORT

Pharma-Bio Serv PBSV continued on a steady path in 2Q FY22. Management's confidence in the underlying business led to the decision to pay an additional cash dividend of $0.075/share in March, its second since the end of FY21.

As we've seen in the past few years, economic uncertainty continues to push out new project starts across the pharmaceutical industry. In July 2021, the US FDA resumed a normalized pace of cGMP, but a significant backlog remains. According to Fierce Pharma, at the end of 2021, the FDA reported it had completed 1,139 of its outstanding pharmaceutical and medical device inspections, roughly 35% of its backlog. In addition, the FDA reported that its backlog of NDA approval inspections rose to 52 in December, from 39 in May 2021. As the FDA continues to clear its backlog, we expect PBSV's new project pipeline to accelerate, particularly in Puerto Rico and the US.

For now, we are trimming our FY22 forecast and our valuation target slightly. Our FY22 revenue target is now $20.8 million, down from $21.5 million. We are lowering our FY22 EPS estimate from $0.10 to $0.08. Our estimates for FY23 are unchanged.

Recent Results

In 2Q FY22, Pharma-Bio Serv's revenue was largely flat at $5.0 million, compared with the year earlier period. While weakness continues in the Puerto Rico consulting market, US business continues to rise $0.8 million (+157% YoY) in the US.

Gross profit margins in the quarter declined 110bps in FY21 to 24.5% period due largely to the end of a high-margin long-term contract in Puerto Rico, and inflation. For FY22, we are targeting gross margins in the 27-28% range. 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 quarter was largely unchanged at $0.24 million.

At April 30, the Company had $13.2 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 updated target valuation is $1.77, driven primarily by a $2.7 million reduction in cash on the balance sheet, due to the March dividend payment, and more modest top-line and margin expectations for FY22.

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