Equity Analysis /

CPCI: 3Q18/19 – volumes drive top line while margins rebound; upgrade to Overweight

    Mohamed Hamza

    Topline driven by volumes

    CPCI recorded 3Q18/19 revenues of EGP233 million, up 10% YoY and down 5% QoQ. The Ministry of Health (MoH) has not announced price-hike in the past year, hence we consider the topline improvement to be volume-driven. Management announced that 47 drugs are expected to be loss-making; of which 43 products will result in losses of EGP19.6 million. Accordingly, efforts to limit their production could possibly be the factor behind QoQ drop. In contrast, the introduction of 4 new products to CPCI’s portfolio in FY18/19 is presumed to improve YoY performance. Management noted that local sales increased by 19% YoY vs lower export sales by 9% YoY, which could have been a factor of stronger EGP/USD.

    Margins rebound sequentially to last year’s levels

    CPCI demonstrated a much-improved QoQ GPM performance, up from 17.3% in 2Q18/19. CPCI displayed stable annual margin, where GPM stood at 25.9% in 3Q18/19 vs 26.4% in 3Q17/18. As mentioned earlier, the drop in quarterly volumes to limit the impact of loss-making product lowered COGS by -15% QoQ. Management is expecting a total reported loss of EGP22.7 million from the loss-making drugs in FY18/19.

    EBITDA margin came in at 18.8%, up 1.1pps QoQ and 10.1pps YoY. Annual increase is attributed to SG&A expenses decreasing by 34% YoY. From a low-base in 2Q18/19, QoQ EBITDA and NPM margins in 3Q18/19 witnessed improved margins on the back of higher GPM and lower SG&A expense (-36% YoY). Accordingly, 3Q18/19 NPM recorded 12.1% vs 5.2% in 2Q18/19.

    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. 
    2. With increasing population and urbanization rates, the 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 2.9% of FY18 total drug sales in Egypt, presenting an opportunity to gain higher contribution to total pharma sales through the introduction of cheaper drugs.
    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 manufacturers such as CPCI. 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.

    Upgrade to Overweight: Trading at low multiples, but awaiting catalysts

    CPCI is trading at an EV/EBITDA19/20 of 2.0x and P/E19/20 of 4.1x, which are below the market average of 11.1x and 13.7x respectively. Small-cap pharma manufacturers such as CPCI 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, labour inefficiencies and high production costs in addition to low price-point SKUs. We believe the sector could unlock its potential following technical upgrades, deployment/sale of unutilized land plots, and price hikes. It was reported earlier that the Ministry of Public Enterprises revealed plans to raise the prices of loss-making drugs, which could be a key catalyst for stocks like CPCI. 

    In FY19/20, CPCI expects to introduce 10 new products, register 5 and have over 13 drugs under the regulatory approval process. Management also announced FY19/20 machinery capex at EGP40.5 million vs EGP31.7 million in FY18/19. On the operational side, management targets to lower the number of loss-making drugs to 38 (EGP12.9 million) in FY19/20  vs 47 in FY18/19.

    In light of the recent share price slump, and our unchanged DCF-based FV of 50.0, we upgrade our recommendation from Equalweight to Overweight.