Equity Analysis /

ADCI: Q3 18/19 – Volume-driven top-line; maintain Overweight

    Mohamed Hamza

    Annual and sequential top-line improved on higher volumes

    Arab Drug Company (ADCI) recorded Q3 18/19 revenues of EGP111mn, up 12% yoy and 2% qoq. The Ministry of Health (MoH) did not announce a price hike in the past quarter, therefore we believe top-line enhancement is volume-driven. 

    Cost pressures downsizes margins 

    ADCI demonstrated margin stability in previous quarters, where average GPM stood at 32% in H1 18/19. However, Q3 18/19 recorded the lowest margins in the past three years. Management reported a loss of EGP7.6mn from selling loss-making drugs. Accordingly, GPM recorded 27.9% in Q3 18/19 versus 31.8% in Q2 18/19 and 33.5% in Q3 17/18 as a result of increased cost pressure from the lack of price rise as well as increased active pharmaceutical ingredient (API) costs (+25% yoy). 

    EBITDA margin came in at 15.8%, down 2.7ppts qoq and 6.8ppts yoy. The annual drop is attributed to SG&A expenses, increasing by 19.1% yoy. Consequently, Q3 18/19 NPM was also dragged down to record 8.6% versus 9.4% in Q3 17/18 and 11.4% in Q2 18/19.

    Catalysts to look forward to

    • The implementation of the Universal Healthcare System (UHS) promises to provide healthcare insurance (including access to more medical drugs) to all Egyptians and become a golden opportunity to push sector sales volumes. It was recently announced that the MoH finalised agreements with Cleopatra, As-Salam, Dar Al Fouad, and Magrabi hospitals to train medical and administrative staff, in light of the Universal Healthcare System’s rollout due in July 2019. 
    • With increasing population and urbanisation, customer base is expected to increase; therefore higher demand for medical drugs.
    • Average Egyptian drug price is USD1.5; exceptionally cheap compared to global average prices.
    • Governmental pharma companies accounted for 2.9% of FY 18 total drug sales in Egypt, presenting opportunity to gain higher contribution to total pharma sales through the introduction of cheaper drugs.
    • HoldiPharma recently requested international consulting companies that are specialised in quality control in the pharmaceutical industries to carry out technical reviews of its affiliates’ production lines. This likely implies renovations for higher efficiency or improved product offering with the objective of market share gains. 
    • The MoH recently increased the prices of Eltroxin 50 mg by 23% and Eltroxin 100 mg by 67%. It is worth noting that this drug is subject to the MoH’s price-cap scheme, indicating flexibility in future drug price increases and giving hope for other pharma manufactures such as ADCI. Also, the Ministry of Public Enterprises reached an agreement with the MoH to study the repricing of some 330 drugs produced by public manufacturers. 

    Trading at low multiples; stock impending catalysts

    ADCI is trading at an EV/EBITDA 19/20 of 1.9x and PE19/20 of 6.0x, which are below market average of 11.1x and 13.7x, respectively. Small-cap pharma manufacturers such as ADCI are trading at cheap multiples as a result of relatively lower liquidity, poor access to management and strategic planning, continuous underperformance from the lack of development plans, labour inefficiencies, high production costs and low price-point SKUs.  

    We believe the sector could unlock its potential following technical upgrades, deployment/sales of unutilised land plots, and price hikes. In FY 19/20, ADCI plans to introduce nine new drugs, while 36 drugs are still under the regulatory approval process. Management also announced FY 19/20 export budget of EGP90.7mn versus EGP53.5mn in FY 17/18, providing some relief from FX pressure due to importing 100% of active pharmaceutical ingredients. It was also reported earlier that the Ministry of Public Enterprises revealed plans to raise the prices of loss-making drugs, which could be a key catalyst for stocks like ADCI.  

    We maintain our DCF FV of 40.0 and Overweight recommendation.