ISPH: Annual performance back to norm, base effect shapes sequential performance

  • Retail segment grown on ASP; ISPH outperforms market
  • Revenue growth held back by slow retail growth, despite solid wholesale performance
  • G&A expenses and IFRS16 implementation hold back bottom line, A weak base effect led the sequential surge

Retail segment grown on ASP; ISPH outperforms market

According to IQVIA data, retail pharma sales recorded EGP19.6 billion in 1Q21, an increase of 5.6% YoY, compared to EGP18.6 billion in 1Q20. Pharma sales growth, as usual, was driven by higher ASP, given that volumes declined by 4.0% YoY to stand at 551.6 million units sold in 1Q21. ISPH retail sales grew by 6.6% YoY in 1Q21, outperforming retail pharma market growth by 0.90pps. The company supplied 21.9% of the retail pharma market in 1Q21, up from 21.8% in 1Q20.

During 2021, ISPH management expects total pharma market growth of 10-12%, compared to 8% in 2020. Retail market is concretively expected to grow by 10% in 2021, compared to around 5% in 2020. According to management, retail pharma sales contribution should gradually go back to the normal 70% contribution (from 66% as of 1Q21) as soon as retail market recovers post the 2020 hit.

Revenue growth held back by slow retail growth, despite solid wholesale performance 

ISPH reported 1Q21 net revenues of EGP4.75 billion, compared to EGP4.44 billion in 1Q20, and compared to EGP4.97 billion in 4Q20 (+7.1% YoY, -4.4% QoQ). Annual increase came on the back of pharmaceuticals market YoY growth, gradually recovering from covid-19 impact on market dynamics. Quarterly decline was on the back of 4Q being the strongest quarter of the year (strong base effect), with net revenues declining by only 4.4% due to 4Q20 being hammered by the syndicate boycott, capping the sequential decline. During 1Q21, key revenue segments performance came as follows:

  • Pharmacy sales (retail) (66.1% of gross sales, -0.5pps YoY) showed an increase of 6.6 % YoY.

  • Wholesale sales (16.2% of gross sales, +2.2pps YoY) grew by c.24.3% YoY.

  • Tenders and Hospitals sales (17.3% of gross sales, -1.9pps) declined by c.3.2% YoY.

Margins came flat annually and expanded sequentially on a weak base

ISPH reported gross profit of EGP373 million in 1Q21, compared to EGP345 million in 1Q20, and compared to EGP324 million in 4Q20 (+8.1% YoY, +15.1% QoQ),  implying a GPM of 7.84% in 1Q21 (+0.1pps YoY, +1.3pps QoQ). On an annual basis, gross profit growth as well as margin performance is mirroring revenue growth, while the sequential expansion is attributed to a weak base in 4Q20, where weak market dynamics as well as unfavorable revenue mix on the impact of syndicates boycott pressured 4Q20 GPM. The growth in gross profit came despite higher wholesale segment sales, where customers receive cash discounts in exchange for cash payments.

During 1Q21, EBITDA grew by 6.4% YoY to stand at EGP181.1 million, reflecting the success of initiatives to control operational expenses. The company’s EBITDA margin was almost flat over the period, recording 3.81% in 1Q21.

ISPH managed to benefit from economies of scale during the quarter, where:

  • Revenue per site grew by 5% YoY, recording EGP75.5 million.

  • Revenue per vehicle grew by 7% YoY, standing at EGP6.3 million.

  • Revenue per employee registered EGP709k, growing by 5% YoY.

G&A expenses and IFRS16 implementation hold back bottom line, A weak base effect led the sequential surge

Net profit came in at EGP50.4 million in 1Q21, compared to EGP50.3 million in 1Q20, and compared to EGP24.0 million in 4Q20 (flat YoY, +109% QoQ), implying a NPM of 1.1% (-0.07pps YoY, +0.58pps QoQ). On an annual basis, G&A expenses grew by 19.2%, representing 1.14% of sales (compared to 1.02% of sales in 1Q21) along with the implementation of IFRS16 (that caused an increase of EGP1.2 million in depreciation expense) have capped bottom line growth despite a 12.4% decline in net interest. However, the quarterly surge is mainly attributed to a weak base in 4Q20, where weak market dynamics and the unfavorable revenue contribution witnessed during the quarter have significantly pressured margins.

2021 Management Guidance

During 2021, management expects Ibnsina Pharma’s performance to continue to revert to the norm, as the retail market rebounds in 2021 and the contribution of the company’s retail segment to top-line growth increases. This comes as management witnessed a solid rebound in April and May 2021, where revenue growth was around 20% during these 2 months, driven by a very weak base during the same months last year.

Management is targeting for full year 2021 the following:

  • Revenue growth of 15-18%.

  • Addition of at least 1% to the company’s market share in 2021; bringing ISPH’s retail market share to around 24%.

  • Improvements in NPM is expected based on opex control and better WC management and thus cost of debt

  • ISPH had a settlement with the syndicate, that allowed the company to deal with a larger client base in 1Q21, leading to a zero-boycott-impact during 1Q21.

Management initiatives to control opex in 2021

  • ISPH has some initiatives to cap opex growth at 11% during 2021, compared to revenue growth guidance of 15-18%. This should accordingly magnify the economies of scale benefits and enhance margin performance.

  • One of those initiatives is bringing down the annual salary increase to 6% in 2021, compared to 15% in 2020. Management decided as well to put recruitment and new hires on hold for the existing branches and the company’s headquarters; where recruitment is only allowed for the newly established branches.

  • Depreciation is expected as well to grow by only 15% in 2021, compared to 50% in 2020.  This will give additional support to the NPM.

Pharos 2021 Earnings Expectations

We expect the company to add around 1.0% to its retail market share, reaching 23.4%. Revenues are expected to record EGP22.8 billion (+22% YoY) and net profits are expected to come in at EGP336 million (+49% YoY). This should be driven by a relatively weak base effect in 2020, gradual recovery in the Egyptian pharma market along with management initiatives to cap opex growth, enhance WC management and thus lower the cost of debt.

ISPH had previously proposed distributing 1 bonus share for each 6 shares originally held, which brings ISPH’s paid-in capital to EGP280 million (an increase of EGP40 million), distributed over 1.12 billion shares at a par value of EGP0.25 per share, accordingly, once bonus shares are distributed, this adjusts our FV to EGP6.98/share, down from EGP8.15/share to reflect the bonus share distribution.

ISPH is trading at 2021f P/E of 10.7x, and EV/EBITDA of 5.3x.

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