Equity Analysis /

ADCI: Volume drives full-year topline; cost pressure trims annual margins

    Mohamed Hamza
    Al Ahly Pharos Securities Brokerage
    1 September 2019

    Annual and sequential volume-driven topline 

    Arab Drug Company (ADCI) recorded 4Q18/19 revenues of EGP111 million, up 24% YoY and flat  QoQ. The Ministry of Health (MoH) has not announced price-hike in the past year, therefore we believe topline growth is volume-driven.

    ADCI recorded FY18/19 revenues of EGP436 million, up 14% YoY. The annual improvement came on the back of higher local and export sales (13% and 17% YoY, respectively). Local sales/total sales was maintained at 86% in FY18/19, matching FY17/18 levels despite the appreciation of the local currency. Management reported that local sales reached EGP279 million of total sales, of which 26 products constituted c.94% of local sales. Export sales recorded EGP62.7 million of total sales, of which EGP33 million is attributed to 'Fintal Spray’ (53% of total export sales).

    Sequential cost relief; full-year margins face pressure

    ADCI demonstrated improved annual GPM (+5.5pps YoY) due to enhanced topline performance as well as revenue growth exceeding COGS growth (+24% YoY vs +14% YoY). On a sequential basis, GPM grew by 9pps QoQ on lower COGS (-13% QoQ). We believe this could be attributed to appreciation of the local currency witnessed during the previous quarter. Further down the income statement, lower cost pressure continued to positively reflect on sequential EBITDA margin and NPM (+8.4pps QoQ and +1.7pps QoQ respectively). As for annual EBITDA margin, growth (+1.5pps YoY) was supported by lower S&G expenses (-7% YoY). However, annual NPM demonstrated a 2.8pps YoY drop on the back of higher ‘other expenses’.

    On a full-year basis, GPM was dragged by 1.7pps YoY as a result of increased cost pressure (+17% YoY). EBITDA margin was also pressured by an 11% YoY increase in SG&A expenses. Despite provision decreasing by 44% YoY, NPM was minimally trimmed on the back ‘other expenses’ increasing by 67% YoY.

    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, 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 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 EGP144 million in 1H19 and a growth rate of 25% 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 manufactures such as ADCI. 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; pending operational enhancement

    ADCI is trading at an EV/EBITDA19/20 of 1.5x and P/E19/20 of 4.9x, which are below market 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, labor inefficiencies and high production costs in addition to low price-point SKUs.

    Management indicated that during FY19 loss-making products contributed a total value of EGP18.9 million, which pressured margins. Also, low capacity utilisation in 'capsules’, ‘creams’, and ‘drops’ (4%, 14% and 42% respectively) remains to be an operational issue, which management is actively looking to improve in the near future.

    In FY19/20, ADCI plans to introduce 9 new drugs, while 36 drugs are still under the regulatory approval process. Management also announced FY19/20 export budget of EGP90.7 million. 

    We maintain our DCF-based FV of EGP40.0 and our Overweight recommendation.