Equity Analysis /
Pakistan

AGP Limited: Fresh triggers awaited; downgrade to Neutral

    Yusra Beg
    Yusra Beg

    Senior Investment Analyst

    Intermarket Securities
    17 October 2019
    • We downgrade our stance on AGP from Buy to Neutral while maintaining our Dec’20 TP of PKR80/sh. AGP’s stock price is up 19%MTD following strong 1HCY19 results season. We think positives (resilience to PKR weakness and higher drug prices) are largely in the price, where we await fresh triggers before revisiting our case.
    • AGP is likely to stand out in 3QCY19 as well, with NPAT of PKR297mn (EPS: PKR1.06), up 7%yoy, but lower 7% qoq. Cost pressures are likely to ease following price hikes in 1H19, where GMs are likely to remain flat at 59% despite 6% PKR devaluation in 2Q.
    • Pakistan’s pharma sector multiples have recovered c. 20% from their CYTD low, to trade at TTM P/E of 15x (excl. SAPL). While this is still below the 5 yr mean (P/E of 22x), a stable PKR should lead to greater confidence on earnings outlook in the upcoming quarters, in our view.

    Positives are in the price; downgrade to Neutral 

    We downgrade our stance on AGP from Buy to Neutral while maintaining our Dec’20 TP of PKR80/sh. AGP stood out with 10%yoy growth in 1H19 earnings (in-line with our estimates) underscoring its ability to maintain margins (2Q19 GMs: 59%, flat yoy) in a tough operating environment, on better cost absorption. However, a stable PKR may entail outperformance by peers (ABOT & GLAXO) who have faced immense cost pressures, in our view. AGP’s stock price is up 22%MTD following strong performance in the outgoing results season. We think positives i.e. resilience to PKR weakness and higher drug prices, largely in the price and await fresh triggers before revisiting our case.

    Despite PKR slippage, expect margins to remain flat

    We expect AGP to post 3QCY19 NPAT of PKR297mn (EPS: PKR1.06), up 7%yoy, taking 9M19 NPAT to PKR1,039mn (EPS: PKR3.71), up 9%yoy. The PKR depreciated 6% on average vs. the US$ (12% at month-end) in 2Q19; and due to a 90 day’s inventory period, we expect this to reflect in 3Q19. That said, price hikes during Mar-Apr’19 are likely to cushion the impact. We expect sales to rise sharply (up 20%yoy in 3Q) while margins are likely to remain flat (3Q19f GMs of 59.0% vs. 58.7% in 2Q19; 59.9% in 3Q18). Admin expenses are likely to stay elevated, while effective tax rate is expected to accelerate to 20% in 3Q from 12% SPLY due to a shift from final tax regime to minimum taxation on trading businesses. We do not expect AGP to announce any dividends. 

    Valuations have begun to recover, price reversal is a risk

    Pakistan’s pharma sector multiples have recovered c. 20% from their CYTD low, to trade at TTM P/E of 15x (excl. SAPL). While this is still below the 5yr mean (P/E of 25x), a stable PKR should lead to greater confidence on earnings outlook in the coming quarters, in our view. Risks to thesis may emerge from potential reversal in MRP of life-saving medicines reportedly directed by PM Imran Khan. In the event of a price reversal, we expect some pharmaceuticals to obtain a stay order, given that this hike was lawfully undertaken.

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