Industry top line growth stood at 12.7% in Q3 18/19
SQUARE achieved double-digit top line growth after four quarters and was in line with our expectations. BXPHAR demonstrated 36% yoy growth and outperformed expectation by 13% driven by strong domestic and international sales. ACME maintained its status quo with a low double-digit growth trajectory. However, RENATA’s top line performance underperformed our expectation by 9% because of the low implementation rate in the government’s family planning program. Overall, it was a moderate quarter for the industry in terms of sales, with BXPHAR being the outperformer.
Lower bottom line growth due to lower margin, rising debt servicing expenses and some one-off adjustments
Industry earnings grew by 7% in the quarter, underperforming top line growth. Except for BXPHAR, bottom line growth of the other companies underperformed our expectation. Lower margin, rising debt servicing costs, and some one-off tax adjustments translated into low bottom line growth. Earlier we expected 3-4% medicine price hike during the post-election quarter and some margin expansion thereby. Some medicine prices have already increased but the price hike is yet to be across the board. We believe the pharmaceutical companies applied to DGDA (The Directorate General of Drug Administration) for product price revision but it is taking a bit longer than we expected. Therefore, SQUARE and ACMELAB experienced some dent in the margin. SQUARE also recorded one-off tax adjustments for the merger between Square Pharmaceuticals and Square Formulations, which in turn, slowed down bottom line growth.
The debt level of the companies increased by 70% yoy in March 2019, mainly driven by business and capacity expansion by BXPHAR and ACME. Therefore, interest expenses increased significantly, eroding much of the earnings for these two companies. BXPHAR still managed to grow the bottom line by +24% amid strong sales, but ACMELAB generated -6% yoy growth in earnings.
Our top picks: SQUARE and BXPHAR
Within our Bangladesh pharma coverage, our top picks are Square (Buy, TP BDT321, ETR 27.4%) and Beximco Pharma (Buy, TP BDT109, ETR 41.1%). With its investment in Square Kenya (subsidiary), SQUARE bundles together the growth stories of two evolving markets. The temporary hiccups in sales growth keep the share price suppressed as it trades at 16.5x trailing PE vs 21.3x historical median PE (c23% discount). We expect that the acquisition of Nuvista, the launch of its human insulin production unit and the Unit 3 facility (100% capacity expansion) will help Beximco generate c17% sales CAGR and c18% earnings CAGR during the next five years. With such growth expectations, a stock that trades at 11.7x 2019f PE is too cheap to ignore, in our view.