Equity Analysis /

IbnSina Pharma: Growth in line with management's forecast

    Mohamed Hamza

    Q1 19 conference call highlights: Market trends

    Development Egypt’s pharmaceutical market grew 23.5% yoy (+9% volume and +14.5% ASP). ASP growth in Q1 19 contributed to two-thirds of total market growth, whereas volume growth contributed to one-third of total market growth. This was in line with management’s forecast.

    As mentioned in the company's earnings release, ISPH is positioned as the second-largest market player in the Egyptian pharma-distributing company, with a market share of 19.7%  in Q1 19 vs 18.7% in Q1 18. Total market composition is divided into retail market (70% of total market sales) and non-retail market (30% of total market sales). Compared with ISPH figures, c69.5% of total sales arises from the retail segment. Management believes the company is well-positioned in both markets, ensuring ISPH’s growth capacity to be aligned with market growth.

    Management also stressed that operations are ready to benefit from the implementation of the Universal Healthcare System, as hospitals are expected to dispense medicines sooner than later through retail pharmacies.

    Higher credit sales shifted cash conversion cycle

    ISPH’s cash conversion cycle (CCC) increased from five days in Q1 18 to 11 days in Q1 19, as a result of higher receivables DOH (86 versus 80 in Q1 18). This is due to: 1) 56.9% yoy growth of tender sales (sold on credit and represents 11.6% of total Q1 19 sales); 2) lower dependence on wholesale sales (12.1% of total Q1 19 sales versus 15% of total Q1 18 sales), which is mainly sold on a cash-basis; and 3) 93% yoy growth of hospital sales (sold on credit and represents 3.6% of total sales). As a result, tender, wholesale and hospital sales added two, three, and one day/s, respectively to Q1 19 CCC. Management stressed that the change in sales composition witnessed in Q1 19 is a one-off event and should normalise to 2018 levels by Q3 19.

    Since tender sales have higher margins compared with other business segments because of a higher drop-size, management expects to have higher tender sales in the quarters ahead.

    Q2 19 capex additions

    ISPH currently has 59 operational distribution centers (DC) – it plans on adding a new DC to its current roster in Q2 19. Also, management plans to add 15 new vehicles to its current 669 vehicles and replace 25 old vehicles in Q2 19. 70% of total Q1 19 capex were financed via medium-term loans (MTL).

    Anti-trust case developments

    Management has decided to pay the EGP160mn anti-trust fine in Q2 19, once it was informed of UCP’s (a competitor of ISPH and charged with the same amount) decision to pay its own fine. Regarding the decision to appeal the court’s latest decision, management were advised that: 1) ISPH has a high probability of having its appeal accepted, 2) if the appeal is accepted, then a retrial would take place and the court would take years to reach a final verdict, 3) the latest court verdict is enforceable yet not final as a retrial could still take place, 4) in the case of the court annulling or lowering the fine, ISPH is guaranteed to have their payment reimbursed. Management noted that cEGP80mn have been held as provision since end-FY 17 and will continue building additional provision to pay the anti-trust fine. 

    Cash and stock dividend update

    ISPH’s stock dividend of 0.14:1 is expected to be issued before 19 July. Also, a cash dividend of EGP0.07/share will be disbursed on 19 May 19.   

    FY 19 targets

    FY 19 normalised earnings are expected to record  EGP400mn for now; this could be altered post-budget approval in July. Management expects market share to close at 20.7% by end-FY 19, with total pharma market growing at 15-16%.