Equity Analysis /

AXPH: 4Q18/19: Volume is the name of the game, but margins squeezed; cut FV to EGP129.8

    Mohamed Hamza
    Al Ahly Pharos Securities Brokerage
    4 August 2019

    Volume-driven impact on topline 

    AXPH recorded EGP159 million in revenues in 4Q18/19, +31% YoY, but 25% down QoQ. With no recent price-hike announcements by the Ministry of Health (MoH) in the last quarter, QoQ topline drop is attributable to lack of volume growth. We reported earlier that management planned to introduce 5 new drugs in FY18/19 to its current portfolio. Therefore, we believe annual topline improvement came on the back of increased volumes. 

    Margins slashed on increased cost pressures

    GPM recorded 18% in 4Q18/19 versus 29% in 3Q18/19 and 26% in 4Q17/18. Margins annually dipped as a result of increased cost pressure (+50% YoY) along with no price revisions. Management reported that over 46 drugs were sold at a loss in FY18/19. However on a quarterly basis, margins tightened as we believe management could have curbed production volumes for these loss-making drugs to limit their impact on margins; hence the sequential drop in volumes. 

    4Q18/19 EBITDA margin came in at 9% versus 26% in 3Q18/19 and 16% in 4Q17/18. Annual & sequential drop came on the back of a spike in SG&A expenses (+16% YoY & +4% QoQ). As a result, NPM has dragged down 6pps YoY and 11pps QoQ. 

    Catalysts to look forward to:

    1. 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 finalized 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 in July 2019. It was also reported that the General Authority for Accreditation and Health Supervision, one of the bodies supervising the application of UHS, has announced registration requirements and pharmacy accreditation standards within the new system. 70% of Egypt’s pharmaceutical sales are processed through pharmacies, which would support pharma-manufacturers’ topline improvement.
    2. With increasing population and urbanization rates, the customer base is expected to increase; therefore higher demand for medical drugs.
    3. Average Egyptian drug price is USD1.5; exceptionally cheap compared to global average prices.
    4. Governmental pharma companies accounted for 2.8% of 1H19 total drug sales in Egypt, presenting an opportunity to gain higher contribution to total pharma sales through the introduction of cheaper drugs. It was reported earlier that AXPH, ranked 3rd in terms of government-owned pharma sales value, recorded revenues of EGP168 million in 1H19 and a growth rate of 24% YoY.
    5. HoldiPharma has recently requested international consulting companies, specialized in pharmaceutical industries’ quality control, to carry out technical reviews of its affiliates’ production lines, which might imply renovations for higher efficiency or improved product offering with the objective of market share gains. 
    6. MoH recently increased the prices of ‘Eltroxin 50 mg’ by 23% and ‘Eltroxin 100 mg’ by 67%. It is noteworthy 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 manufacturers such as AXPH. Also, the Ministry of Public Enterprises’ enacted an agreement with the MoH to study the repricing of some 330 drugs produced by public manufacturers in the near future.
    7. Increased efforts for the introduction of new drugs (priced at higher prices vs old drugs).

    Trading at low multiples; Cut FV to EGP129.8 

    AXPH is trading at an EV/EBITDA19/20 of 1.7x and P/E19/20 of 4.9x, which are below the market average of 11.1x and 13.7x respectively. Small-cap pharma manufacturers such as AXPH are trading at cheap multiples as a result of relatively lower liquidity, poor access to management and strategic planning, and continuous underperformance from lack of development plans, labor inefficiencies and high production costs in addition to low price-point SKUs. 

    We believe the sector could unlock its potential following technical upgrades, deployment/sale of unutilized land plots, and price hikes. In FY19/20, AXPH plans to introduce 5 new drugs, including Panadol Advance. Management also announced FY19/20 capex of EGP93.25 million (EGP61.4 million for renovations and EGP31.85 million for expansions). 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 AXPH. 

    We cut our DCF-based FV from EGP165.0 to EGP129.8 following the recent drop in margins. However, if the MoH announces price-hikes in the coming period, we should witness margins pick-up pace and normalise to pre-floatation levels. Therefore, we re-adjust our estimates. On our revised FV, we still have an Overweight recommendation on the stock.