Equity Analysis /
Egypt

EIPICO: 1Q19 – Impressive topline performance; margins on the mend; upgrade to Overweight

    Mohamed Hamza

    Local volumes boost topline

    Egyptian International Pharmaceuticals Industries (PHAR EY) reported 1Q19 revenues of EGP915 million, up 33% QoQ and 25% YoY. We believe topline growth came on the back of improved volumes since we have not witnessed any major price hikes from the Ministry of Health (MoH). With management’s inability to extensively increase export sales in the previous quarters, we notice local sales has been the focal point in 1Q19, where local sales/total sales recorded 81% vs 78% in 1Q18, especially with the witnessed strength in the EGP/USD. YoY sales progression was driven by local sales increasing by 29.1% YoY and export sales (19% of total sales) increasing by 10.0 % YoY. 

    Signs of margins recovery 

    Sequential GP and EBITDA margins showed signs of recovery from 26% and 28%, respectively in 4Q18 to 29% and 31%, respectively in 1Q19. The jump in margins is attributable to improved topline performance as well as lower SG&A expenses (-19% QoQ). Management booked provision of EGP6 million in 1Q19 vs reversed provisions of EGP92 million in 4Q18. Hence,  quarterly NPM margins normalized to 24% in 1Q19, down from 30% in 4Q18.

    On an annual basis, GPM recorded 29% in 1Q19 vs 32% in 1Q18. Margins were distressed as a result of: 1) raw material cost surging by c.48% YoY, 2) wages increasing by c.27% YoY, and 3) other COGS expenses increasing by c.11% YoY. Subsequently, EBITDA margins were also burdened owing to SG&A expenses rising by 15% YoY. Due to the unattainability of foreign currency (used in raw material purchases) in 4Q18, management increased FCY borrowing from banks. Consequently, interest expense increased by 155% YoY. On the other hand, the increase in investment income (+314% YoY) and provisions (-74% YoY) offset the surge in interest expense. Therefore, NPM margins slightly contracted to 24% in 1Q19 from 25% in 1Q18. 

    Positive developments; Upgrade to OW

    PHAR is trading at an EV/EBITDA19 of 7.5x and P/E19 of 11.7x, which are below the market average of 12.2x and 18.3x, respectively.  Management has recently started a feasibility study to manufacture biosimilar hormones and cancer diseases drugs in Egypt with investments of up to EGP1 billion. 10,000 square meters of plot land will be allocated for the new facility in the 10th of Ramadan district. Management also approved a cash dividend of EGP4.0/share for FY18 results; implying a DY of 5.2%.

    1Q19 results show an impressive recovery with volume increases. We believe further improvement can be attained through the introduction of new products, future medicine price revisions, the implementation of the Universal Healthcare Act and increased demand with population growth. In light of the recent share price slump, we upgrade our recommendation to Overweight from Equalweight. 

    Local volumes boost topline

    PHAR reported 1Q19 revenues of EGP915 million, up 33% QoQ and 25% YoY. We believe topline growth came on the back of improved volumes since we have not witnessed any major price hikes from the Ministry of Health (MoH). With management’s inability to extensively increase export sales in the previous quarters, we notice local sales has been the focal point in 1Q19, where local sales/total sales recorded 81% vs 78% in 1Q18, especially with the witnessed strength in the EGP/USD. YoY sales progression was driven by local sales increasing by 29.1% YoY and export sales (19% of total sales) increasing by 10.0 % YoY. 

    Signs of margin recovery 

    Sequential GP and EBITDA margins showed signs of recovery from 26% and 28%, respectively in 4Q18 to 29% and 31%, respectively in 1Q19. The jump in margins is attributable to improved topline performance as well as lower SG&A expenses (-19% QoQ). Management booked provision of EGP6 million in 1Q19 vs reversed provisions of EGP92 million in 4Q18. Hence,  quarterly NPM margins normalized to 24% in 1Q19, down from 30% in 4Q18.

    On an annual basis, GPM recorded 29% in 1Q19 vs 32% in 1Q18. Margins were distressed as a result of: 1) raw material cost surging by c.48% YoY, 2) wages increasing by c.27% YoY, and 3) other COGS expenses increasing by c.11% YoY. Subsequently, EBITDA margins were also burdened owing to SG&A expenses rising by 15% YoY. Due to the unattainability of foreign currency (used in raw material purchases) in 4Q18, management increased FCY borrowing from banks. Consequently, interest expense increased by 155% YoY. On the other hand, the increase in investment income (+314% YoY) and provisions (-74% YoY) offset the surge in interest expense. Therefore, NPM margins slightly contracted to 24% in 1Q19 from 25% in 1Q18. 

    Positive developments; upgrade to Overweight

    PHAR is trading at an EV/EBITDA19 of 7.5x and P/E19 of 11.7x, which are below the market average of 12.2x and 18.3x, respectively.  Management has recently started a feasibility study to manufacture biosimilar hormones and cancer diseases drugs in Egypt with investments of up to EGP1 billion. 10,000 square meters of plot land will be allocated for the new facility in the 10th of Ramadan district. Management also approved a cash dividend of EGP4.0/share for FY18 results; implying a DY of 5.2%.

    1Q19 results show an impressive recovery with volume increases. We believe further improvement can be attained through the introduction of new products, future medicine price revisions, the implementation of the Universal Healthcare Act and increased demand with population growth. In light of the recent share price slump, we upgrade our recommendation to Overweight from Equalweight, with an unchanged target price of EGP95.3.