Equity Analysis /
Pakistan

AGP Limited: Margins remain best in class; reiterate Buy, trim TP

    Yusra Beg
    Yusra Beg

    Senior Investment Analyst

    Intermarket Securities
    28 August 2019
    • We reduce our CY 19/20f EPS estimates for AGP by 2%/13%, after incorporating a deceleration in volume growth (5%-6% over the medium-term, vs. 7%-8% previously), partially compensated by price hikes this year. AGP’s margin profile remains intact and we see GMs at c60% going forward. Target price roll-over leads to a Dec’20 TP of PKR80/sh, and we maintain our Buy rating.
    • Following trade suspension with India, AGP has turned towards alternative sourcing for 80% of the raw materials imported from Mylan, India; we see limited impact to the bottom line. Recent price hikes have largely compensated local pharmaceuticals for PKR devaluation within this cycle; FY 19 CPI (7.3%) should further strengthen margins for the balance of the year, where AGP is likely to stand out among peers.
    • AGP has shed 36% CYTD to trade at CY 19/20f P/E of 9.6x/8.3x, having de-rated to pre-CY 13 levels (forward P/E: 10.5x excl. ABOT). This is significantly below the mean, where pharmaceuticals post-CY 13 have traded at forward P/E of 25x (2.85 times the index). We think there is significant potential for re-rating particularly if the exchange rate stabilises at present levels.

    Earnings estimates reduced but maintain Buy  

    We reduce our CY 19/20f earnings estimates for AGP by 2%/13% after incorporating a deceleration in volume growth (5-6% over the medium-term, vs. 7%-8% previously), which is partially compensated by CPI linked price hikes (ad-hoc increases also took place earlier this year). Our new CY 19/20F EPS estimates are PKR5.84/6.72. AGP’s margin profile remains broadly intact, which helps shore up estimates. However, TP roll-over leads to a Dec’20 TP of PKR80/sh (from PKR113/sh previously) which offers an ETR of 48%. Thus we maintain our Buy rating on the scrip. 

    AGP remains our top pick within the pharmaceutical sector due to (i) relatively better resilience to currency weakness, (ii) robust sales growth despite a tough economic environment and (iii) consistent earnings quality unlike most other pharmaceuticals. 

    Q2 CY 19 results on track

    AGP posted Q2 CY 19 NPAT of PKR318mn (EPS: PKR1.14), up 12% yoy, in line with our expectations. This took H1 CY 19 NPAT to PKR743mn (EPS: PKR2.65), up 10% yoy (pre-tax: up 14% yoy). The company also announced first interim dividend of PKR1.25/sh. Revenue momentum remained strong (19% yoy), driven by the 15% price hike announced (for all drugs other than those in hardship) in mid-Q1 CY 19. Gross margins came in at 58.7%, in line with our expectations, underscoring AGP’s ability to maintain margins in a difficult operating environment due to better cost absorption.

    Price hikes to make up for slow volume growth this year 
    Volume growth for pharmaceuticals has slowed to mid-single digits (from 10%+ historically) due to lower affordability exacerbated by multiple price hikes in the recent past. AGP reported 8.2%yoy normalised growth in H1 CY 19. While volume growth for top brands (Rigix, Ceclor) remains robust, we prudently incorporate 5%-6% volume growth over the medium-term. This should, however, be largely compensated by price hikes this year.

    Margins likely to improve from here, PKR stable for now

    Local pharmaceutical companies have fared better compared with MNCs, with recent price hikes (FY18 CPI: 3.9%, flat 15% in Feb’19) largely compensating for the PKR devaluation within this cycle. FY 19 CPI (7.3%) should further strengthen margins for the balance of the year, where the exchange rate has seemingly normalised (REER down to 90.5(p) for the month of Jun’19). This has allowed the PKR to appreciate 2% in Aug’19, which we flag as a major catalyst for Pakistan pharmaceuticals. We expect AGP’s margins to grow from 59% in CY 19f to 60%+ by CY 23f. Recent trade suspension with India (due to Indo-Pak border tension) affects AGP’s sales from Mylan, India. However, AGP has developed alternative sourcing for 80% of the raw materials, thus we see limited impact to the bottom line.

    Amalgamation of AGP shares into AitkenStuart Pakistan is a non-event

    AGP’s former parent – OBS Pakistan recently underwent restructuring, amalgamating shares of AGP into AitkenStuart Pakistan (Pvt.) Ltd. Nevertheless, the ultimate beneficial ownership of AGP remains with the Chairman Tariq Moinuddin Khan. 

    Risks: (i) Regulatory tightening by DRAP, (ii) persistent PKR depreciation (iii) rising counterfeit and smuggled products and (iv) slowing exports.