Earnings Report /
Egypt

ADCI: Higher prices kick in, margins expand; maintain Overweight

    Al Ahly Pharos Securities Brokerage
    7 November 2019

    Price-driven topline enhancement

    ADCI recorded EGP126mn in revenues in Q1 19/20, up 19% yoy and 13% qoq. According to management, both annual and sequential topline improved on the back of price increases for some of its SKUs. We expect further topline enhancement following Holdipharma’s announcement that it increased prices for 160 SKUs produced by its subsidiaries.

    Cost relief and healthy topline boost margins

    GPM recorded 41.8% in Q1 19/20 versus 32.2% in Q1 18/19 and 36.9% in Q4 18/19. ADCI recorded higher GPM as a result of raw material cost and wages falling by 2% yoy and 15% yoy, respectively and improved topline performance as mentioned above. 

    Raw material cost dropped due to the recent appreciation of the EGP/US$, while salaries dropped as a result of lower labour force in Q1 19/20 (1,191 employees vs 1,244 employees in Q1 18/19). Despite SG&A expenses increasing by 17% yoy and 8% qoq, positive topline performance trickled down to expand Q1 19/20 EBITDA margin by 9.2ppts yoy and 5.1ppts qoq as well as NPM by 5.8ppts yoy and 4.6ppts qoq. 

    Catalysts to look forward to

    1. Holdipharma announced that it raised the prices of 160 medicines of its subsidiaries (ADCI, AXPH and CPCI) in the face of continued loss-making SKUs, which has resulted in sector margins to drop extensively since EGP floatation. We believe this is the catalyst we’ve been waiting for both pharma-manufacturers and distributors (ISPH) to achieve higher margins and enable the companies impacted to continue their development plans. This indicates flexibility in future drug price increases and giving hope for other pharma manufactures such as ADCI.
    2. 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.
    3. With increasing population and urbanisation rates, customer base is expected to increase; therefore higher demand for medical drugs.
    4. Average Egyptian drug price is US$1.5; exceptionally cheap compared to global average prices.
    5. Governmental pharma companies accounted for 2.8% of 9M19 total drug sales in Egypt, presenting opportunity to gain higher contribution to total pharma sales through the introduction of cheaper drugs. It was reported earlier that ADCI, ranked 5th in terms of government-owned pharma sales value, recorded revenues of EGP217 million in 9M 19 and a growth rate of 18.7% yoy.
    6. 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. 
    7. Increased efforts for the introduction of new drugs (priced at higher prices vs old drugs).

    Trading at low multiples; awaiting further price increases

    ADCI is trading at an EV/EBITDA19/20 of 1.7x and P/E19/20 of 5.5x, which are below peer group 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, and continuous underperformance from lack of development plans, labour inefficiencies and high production costs in addition to low price-point SKUs. 

    Management recently disbursed a cash dividend of EGP3.8/share (DIY 11.6%). We believe the sector could unlock its potential if the Ministry of Public Enterprises raises the prices of loss-making drugs further as mentioned above. ADCI management previously indicated that FY 19 loss-making products contributed a total of EGP18.9mn in losses. 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.