Equity Analysis /

CPCI: Volumes dictate topline, margins squeezed; cut FV

    Mohamed Hamza
    Al Ahly Pharos Securities Brokerage
    1 September 2019

    Topline driven by volumes

    Kahira Pharmaceuticals (CPCI) recorded 4Q18/19 revenues of EGP223 million, down 8% YoY and down 5% QoQ. Annual and sequential drop came on the back of lower volumes as the Ministry of Health (MoH) has not announced price-hikes in FY18/19. Management announced that 47 drugs were loss-making in FY18/19, therefore we assume efforts to limit their production resulted in topline drop.

    Full-year revenues amounted to EGP963 million, up 11.6% YoY on the back of higher local volumes. Management was successful in introducing 8 new products to the local market, while export sales was trimmed by 9.6% YoY, partially impacted by the strength in the EGP/USD rate. 

    Annual margins tighten on lower sales & higher costs

    Lower production of loss-making products as well as the relative appreciation of the local currency has resulted in an 8% QoQ drop in 4Q18/19 COGS, which resulted in a higher sequential GPM of 28.3% vs 25.9% in 3Q18/19. Sequential EBITDA margin drop (-8.7pps) is attributed to SG&A increasing by 114% QoQ. On an annual basis, 4Q18/19 GPM & EBITDA margins witnessed a 1.4pps and 2.0pps drop,  respectively, attributed to the drop in sales volumes as mentioned earlier. 4Q18/19 NPM continues to face pressure as a result of ‘ other expenses’ increasing by 35% YoY. 

    On a full-year basis, GPM dropped to 24% vs 28% on the back of increased cost pressure: 1) raw material costs increased by 15.7% YoY, despite the appreciation in the local currency and 2) wages increased by 18.9% YoY, which was not offset by the decline in  SG&A expenses by 3.6% YoY, EBITDA margin continued to be under pressure, as a result of lower gross profit. NPM was also burdened by lower interest income (-37% YoY) as well as higher ‘other expenses’ (+166.1% YoY).

    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. It was also reported that the General Authority for Accreditation and Health Supervision, one of the bodies supervising the application of UHS, has announced registration requirements and pharmacy accreditation standards within the new system. 70% of Egypt’s pharmaceutical sales are processed through pharmacies, which would support pharma-manufacturers’ topline improvement.
    2. With increasing population and urbanization rates, 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 2.8% of 1H19 total drug sales in Egypt, presenting opportunity to gain higher contribution to total pharma sales through the introduction of cheaper drugs. It was reported earlier that CPCI, ranked 2nd in terms of government-owned pharma sales value, recorded revenues of EGP178 million in 1H19 and a decline rate of 1% YoY.
    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 manufactures 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.
    7. Increased efforts for the introduction of new drugs (priced at higher prices vs old drugs).

    Trading at low multiples; Downgrade FV to EGP44.2

    CPCI is trading at an EV/EBITDA19/20 of 2.0x and P/E19/20 of 6.1x, which are below 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, labor inefficiencies and high production costs in addition to low price-point SKUs.  We believe 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 an operational side, management target to lower the number of loss-making drugs to 38 (EGP12.9 million) in FY19/20  vs 47 in FY18/19.

    We cut our DCF FV from EGP50.0 to EGP44.2 following the recent drop in margins. However, if the MoH announces price-hikes in the coming period, we should witness margins pick-up pace and normalize to pre-floatation levels; therefore re-adjust our estimates. On our revised FV, we still maintain an Overweight recommendation on the stock.