AFT Pharmaceuticals: A Valuation Gem Amid Global Expansion?

The recent earnings report from AFT Pharmaceuticals Limited (NZSE:AFT) has ignited a critical debate among investors: Does this pharma specialist's valuation still justify a buy, or are the risks of margin contraction and global expansion missteps too great? Let's dissect the numbers and trends to uncover the answer.

Post-Earnings Reality Check: Growth vs. Margin Trade-offs

AFT delivered a revenue beat in FY2025, hitting $208 million—a 11% jump from the prior year—thanks to strong performance in Australia and New Zealand. However, the operating profit dropped to $17.6 million, pressured by an $8 million decline in licensing income and $2.5 million in international expansion costs. While the company's gross margin improved to 44.1% (driven by high-margin product sales), the operating margin fell to 8.5% from 12.4%, underscoring execution challenges.

The EPS dropped 27% to $0.0114, prompting analysts to slash FY2026 estimates: Revenue forecasts were reduced by 4.1% to $245.5 million, and EPS guidance cut by 11.1% to $0.16. Yet, the stock's price target remains unchanged at NZ$3.70, suggesting long-term faith in AFT's growth narrative.

Valuation: A Middle Ground Between Growth and Value

AFT trades at a P/E of 24.4x, slightly below its peer average of 26.3x but above the global pharma sector's 23.6x. The EV/EBITDA multiple of 17.2x is elevated compared to FY2024's 12.6x but aligns with its 18% revenue growth target for FY2026.

Growth Drivers: R&D Pipeline and Market Expansion

The company's $15 million annual R&D spend is fueling promising products like Crystaderm (antibacterial cream) and Micolette (micro-enema), targeting underserved markets. With 24+ off-patent injectables in the pipeline, AFT aims to tap a $450 million core market, supporting its $300 million revenue target by FY2027 (a 20% CAGR).

Geographically, progress in South Africa, Canada, and the UK—where losses are expected to turn breakeven by FY2026—adds strategic depth. The Australia and New Zealand markets, contributing 87% of FY2025 sales, also show resilience: Australia's sales grew 17%, with profits surging 65%, while New Zealand's sales rose 10%.

Risks: Margins, Supply Chains, and Valuation Pressure

• Margin Headwinds: R&D and marketing costs will keep pressure on margins until new markets stabilize. The international segment's operating loss of $7.4 million highlights the risks of premature scaling.
• Supply Chain Volatility: The Korean doctors' strike in early FY2025 disrupted Asia-Pacific supply chains, a reminder of operational fragility in emerging markets.
• Valuation Stretch: At 17.2x EV/EBITDA, AFT's valuation hinges on delivering on its FY2027 $300 million target. Missed milestones could trigger a re-rating downward.

The Case for Buy: Why the Downgrades Miss the Bigger Picture

Analysts' near-term cuts are justified, but the long-term story remains compelling:
1. Margin Recovery Potential: AFT's Australian and New Zealand operations are projected to see small EBIT margin expansions in FY2026, offsetting global losses.
2. Undervalued Pipeline: The PEG ratio of 0.46 suggests the stock is cheap relative to its 14% annual growth forecast.
3. Debt Management: Net debt fell to $14.5 million, a 10% reduction from FY2024, signaling financial discipline.

Investment Thesis: Buy on Dip, but Monitor Margins

AFT's NZ$3.70 price target implies a 33% upside from its current price of NZ$2.78. While risks are material, the company's dividend hike to 1.8cps, strong regional dominance, and diversifying revenue streams make it a high-reward, moderate-risk bet for investors with a 2–3 year horizon.

Final Verdict: AFT is Worth the Gamble

Despite near-term margin pressures, AFT's global expansion playbook and high-margin product pipeline position it to outperform peers in the long term. At current levels, the stock offers a compelling entry point for growth investors willing to overlook short-term volatility.

Actionable Takeaway: Accumulate AFT on dips below NZ$2.80, with a target of NZ$3.50 by end-2026. Monitor Q3 FY2026 results for margin recovery signals and international market progress.

The path to $300 million is bumpy, but AFT's combination of execution capability and undervalued growth thesis makes it a standout pick in the pharma sector.