Aspen: caught
in a crossfire

It’s important to emphasise that the situation remains fluid, information is limited, and the outcome of the dispute is yet to be determined. In essence, one of Aspen’s customers at its French manufacturing facility is attempting to exit its ‘take-or-pay’ contract with the group.

Indications are that the unnamed customer, which sells flu and mRNA vaccine products, is struggling with its own business, likely driven by global dismissal of Covid-related vaccines. While take-or-pay contracts are typically watertight as they reserve a portion of a company’s manufacturing capacity, such considerations become less relevant if the customer is under severe financial strain.

It would seem that Aspen has become caught in the crossfire of the trade wars unleashed by the Trump administration – a key component of the customer’s problems relates to the new tariffs introduced by the US and the desire to have its products manufactured in that country. While Aspen has elected to keep the details of the contract confidential, we believe there is a strong likelihood of it being brought to an end.

VALUATION REVISION

In light of these developments, we need to revise our valuation framework for Aspen, taking into account the following factors:

Near-term impact on profits. Depending on what assumptions one makes, Aspen is likely to report around 30% year-on-year declines in normalised headline earnings per share for the years to June 2025 and 2026, relative to our prior expectations.

Medium-term growth implications. While Aspen’s more predictable commercial pharmaceutical division is far larger than its manufacturing arm, the operating leverage inherent in manufacturing creates an outsized impact on the group’s net profit. The manufacturing division, which has absorbed around R10 billion of capital expenditure in recent years, has long been touted as the group’s growth engine.

While the capacity released by the mRNA customer can be sold to others, past experience suggests this will take time. Aspen has previously faced challenges and delays in ramping up its sterile manufacturing capacity – including pre-filled syringes in France and vials/cartridges in South Africa. Typically, there is a one- to two-year lag associated with new manufacturing business due to regulatory approvals and tech transfers. The news effectively sets manufacturing profit back by around four years and raises doubts about Aspen’s ability to fill the available manufacturing capacity in South Africa.

Erosion of market confidence. The third – and perhaps most intangible – consequence of this development is erosion of market trust in Aspen and its management. While the merits of this can be debated given the existence of signed take-or-pay contracts and how the company itself was taken by surprise, the reality remains: Aspen will miss its guidance.

Unfortunately, the recent news reinforces a growing perception that the company struggles to fulfil its commitments. It has repeatedly pushed out timelines relating to the manufacture of vaccines for GAVI and the Serum Institute of India, and has failed to sign a contract to produce GLP-1 weight-loss and diabetes drugs. With confidence impaired, the market will now be less willing to pay up for expected future growth, effectively reducing the price/earnings multiple at which Aspen trades.

Considering all these factors, we have arrived at an updated valuation of R138 per share. The change in valuation is illustrated on the chart below:

Over time, we anticipate that this valuation may prove too punitive, but until the facts are clearer, we prefer to take a conservative approach. In a scenario in which Aspen secures a replacement for the mRNA contract, while the rest of the business meets expectations and management restores market confidence, our revised valuation would rise to R170 per share.

The Aspen story underscores the inherent risks of investing in individual businesses, where idiosyncratic events can significantly impact stock prices. Whether it’s a regulatory concern, which resulted in the 12% drop in the Naspers price in January, price declines related to mergers and acquisitions such as those involving Goldfields, African currency fluctuations impacting MTN, or geopolitical events such as Russia’s invasion of Ukraine, which had repercussions for Mondi in 2022, investors must recognise that the unforeseen is an intrinsic part of investing.

It’s precisely this potential for loss that drives investors to seek higher returns from stocks than from bonds – and why, over time, equity markets have consistently outperformed bonds. At the same time, it reinforces a fundamental principle of portfolio construction: diversification is the only free lunch in investing. This is why we are always highly judicious in managing position sizes within client portfolios, ensuring that no single holding can unduly compromise long-term outcomes.