Earnings Report /
Egypt

EIPICO: Q2 19 – Volume-driven top line performance; maintain Overweight

    Mohamed Hamza
    Al Ahly Pharos Securities Brokerage
    15 August 2019

    Annual top line enhancement, but sequential drop

    PHAR reported Q2 19 revenues of EGP839mn, down 8% qoq and up 18% yoy. Both annual and sequential top line performance is dependent on PHAR’s capabilities to increase/decrease volumes since the Ministry of Health (MoH) has not initiated any major price hikes in FY 19. Therefore, we can assume that annual improvement came on the back of introduction of new drugs as well as market share increase, while sequential drop is mainly attributed to loss of market share as well as absence  of new drugs.  

    On segments, annual top line enhancement was supported by local sales growth of 29.7% yoy, which constitutes c82% of total sales. On the other hand, we notice exports sales continue to witness a drop (-5.5% yoy) as a result of EGP/US$ strengthening. 

    Increased costs and operational expenses tighten margins

    On an annual basis, GPM recorded 23% in Q2 19 vs 33% in Q2 18. Margins were trimmed on account of: 1) raw material cost rose by c36% yoy, 2) wages surged by c23% yoy. EBITDA was pressured further due to SG&A expenses rising  by 7% yoy. Despite FX gains increasing by 386% yoy, NPM continued to be dragged down as a result of net interest balance falling by 16% yoy and ‘sister companies’ profits’ decreasing by 50% yoy. We reported earlier that management increased debt (recording EGP946mn in H1 19 vs EGP536mn in H1 18) due to  the unattainability of foreign currency to purchase the required raw materials.

    On a sequential basis, GP, EBITDA and NP margins also dropped to 23%, 26%, and 21%, respectively in Q2 19 (from 29%, 31%, and 24%, respectively in Q1 19). Sequential drop is attributable to depressed top line performance as well as sustained cost pressures.

    Forecast margins near annualised performance; maintain Overweight

    PHAR is trading at an EV/EBITDA19 of 7.5x and P/E19 of 11.2x, which are below market average of 12.2x and 18.3x, respectively.  With margins dropping in Q2 19 in comparison to Q1 19, where results showed impressive recovery, we will be getting in touch with management to find out whether the drop in margins is a one-off event or will operations pick-up pace in the remaining two quarters. So far, our forecast margins are close to annualised figures. Therefore, we maintain our Overweight recommendation with an FV of EGP95.3.

    In relation to the development of a EGP1bn biosimilar hormones and cancer diseases facility, management has approved to acquire a 10,344sqm plot land in 10th of Ramadan and pay an initial deposit of cEGP2.6mn (10% of total land value). We are currently awaiting further developments in order to incorporate it in our FV.

    Going forward, we also believe operational enhancement can be attained via the introduction of new products, future medicine price revisions, as well as lowering cost pressures following the recent appreciation of the EGP/US$ (100% of raw materials are imported).