Earnings Report /
Egypt

IbnSina Pharma: Q2 20 – Weak market dynamics pressure performance; maintain Overweight

  • Diversification shielded revenue growth

  • Strong wholesale and tenders revenue growth offset weak retail performance

  • Economies of scale were not enough to shield margins against unfavourable revenue mix

Al Ahly Pharos Securities Brokerage
13 August 2020

Diversification shielded revenue growth

According to IMS Health latest available data, during 1H2020, Egypt’s retail pharmaceutical market registered total sales of EGP36.20 billion, slightly up by 0.8% YoY and volumes sold recorded a modest decline of 4.8% YoY reaching 1.13 billion units in 1H2020. Retail pharmaceutical market was most aggressively hit during April and May (sales dropped by 11.0% and 16.0% during April and May, respectively), mainly on movement restrictions imposed and the closure of public hospitals' outpatient clinics that caused demand on non-chronic disease medication to drop. However, June had witnessed a significant rebound, growing by 18% YoY as economic activity showed some recovery, government lifted night curfews with a consequent re-opening of public and doctors’ clinics.

ISPH Pharmacies sales segment grew by 3.5% YoY, outperforming total retail market growth in 1H2020.

In our view, Retail market performance in 2H2020 is basically dependent on the occurrence of a second wave of Covid-19 surge in cases, that might hit 4Q20, mainly after lifting movement restrictions and despite partial economic recovery witnessed. However, if the excepted second wave didn’t happen,  we expect that the market will return to healthy/normalized growth trajectory during 2H20.

Total pharma market growth registered a growth of around 9% YoY, out of which around 29% are the non-retail market growth. Despite weak retail growth, ISPH’s exposure to both retail and non-retail segments supported the company’s performance and hedged against weak retail market growth.

ISPH continues to be Egypt’s fastest-growing distributor of pharmaceutical products, with gross sales growing by 17.8% for 1H20, outperforming the wider industry by a margin of 8.8pps. ISPH recorded a retail market share of 22.8% in 1H20, up from 21.8% in 1Q20, and up from 20.7% in 1H19.

Strong wholesale and tenders revenue growth offset weak retail performance

ISPH reported 2Q20 net revenues of EGP4.43 billion, compared to EGP3.82 billion in 2Q19, and compared to EGP4.44 billion in 1Q20 (+16.0% YoY, -0.3% QoQ). ISPH’s 1H2020 net revenues came at EGP8.87 billion, compared to EGP7.54 billion in 1H19, which is an increase of 17.6% YoY; but with significant changes in revenue contribution, where:

  • Pharmacy sales (retail) (61.5% of gross sales, -7.4pps YoY), showed a slight increase of 3.5% YoY.

  • Wholesale sales (18.8% of total sales, +5.0pps YoY) grew by c.48.0% YoY.

  • Tenders and Hospitals sales (16.1% of total sales, +2.2pps) increased by c.63.6% YoY.

  • Personal care sales (3.2% of total sales, +0.2pps YoY) increased by c.37.4% YoY.

  • Third-Party Logistics sales (0.3% of total sales, -0.1pps YoY) increased by c.27.0% YoY.

ISPH’s operational diversification shields the company’s topline performance against market fluctuations

During 1H20, ISPH core retail business namely pharmacies, showed a slight growth of 3.5% YoY, contributing 61.5% of gross sales (-7.4pps YoY); outperforming Egypt’s overall weak retail market growth of 0.8%. Weak retail segment growth was offset by strong wholesale sales as well as tenders and hospital sales strong growth of 48.0% YoY and 63.6.0% YoY, respectively.

ISPH’s fleet grew to 753 vehicles in 1H2020, up from 683 vehicles in 1H2019, boosting ISPH’s ability to satisfy increasing demand and servicing more clients (43,982 clients served in 1H2020, compared to 42,087 clients served in 1H2019).

Economies of scale were not enough to shield margins against unfavourable revenue mix

ISPH reported gross profit of EGP701.2 million in 1H20, compared to EGP608.3 million, recording an increase of 15.3% YoY and implying a GPM of 7.90% in 1H2020 (-0.16pps YoY). The slight YoY drop in GPM can be mainly attributed to higher contribution (+5.0pps YoY) of wholesale segment to gross revenues, leading to higher cash discounts.

EBITDA has modestly grew by 8.9% YoY, recording EGP326.9 million in 1H2020, implying an EBITDA margin of 3.68% (-0.3pps YoY).  A slight margin deterioration can be as well attributed to unfavorable market dynamics, where ISPH is using all its resources/fixed costs in serving a falling demand and lower revenues.

During 1H2020, the slight decline in operating margins came despite achieved economies of scale, where revenue per site grew by 18% YoY to EGP143 million per site, revenue per vehicle and revenue per employee modestly rising by 7% YoY and 8% YoY, respectively.

Net profit came in at EGP38.71 million in 2Q20, down from EGP60.46 million in 2Q19, and down from EGP50.3 million in 1Q20 (-36.0% YoY, -23.0% QoQ), implying a decline of 0.7pps YoY and a drop of 0.3pps QoQ in NPM to settle at 0.9% in 2Q20. Weak bottom line performance is mainly attributed to a surge of 84.5% in depreciation expense; primarily as a result of an increase in long term assets investments. Moreover, other expenses surged to EGP14.4 million in 2Q20, up from EGP2.3 million in 2Q19; mainly due to a donation of EGP4.0 million made to the Egyptian Authority for Unified Procurement, a donation of EGP5.0 million to the government’s ‘Ahalena’ welfare fund, as well as Covid-19 outlays including disinfectants and PPE for ISPH staff and premises.

Higher inventory levels (inventory DoH reached 36 days in 1H2020, slightly up from 35 days in 1H2019) were recorded to secure product availability along with higher contribution of tenders and private hospitals sales -credit intensive in nature (receivables DoH registered 95 days in 1H2020, up from 93 days in 1H2019)- with payables DoH recording 123 days, stable YoY. Hence, ISPH’s working capital increased from 6 days during 2019 to 8 days in 1H2020.

ISPH spent EGP95.7 million in capex during 1Q20, compared to EGP173.7 million in 1H19. Capex investments during the period included EGP16.4 million spent on distribution centers where construction works were affected by the imposition of a curfew during the period and a consequent reduction in contractors’ and government agencies’ working capacity. Upgrades were allocated EGP33.9 million, while around EGP14.7 million was invested in vehicles during 1H2020. CAPEX related  to Ibnsina Pharma’s headquarters recorded EGP2.2 million during the period. Technology projects were allocated EGP28.5 million.

Pharma market dynamics still favourable for growth

Solid pharma market dynamics along with ISPH’s exposure to retail and non-retail segments will support ISPH’s growth going forward and hedge against quarterly fluctuations and any potential challenging circumstances. Demand on pharmaceutical products, despite being an out of the pocket spending, is bolstered by rapid population growth (+2% per annum). Egypt’s per capita outlay on pharmaceutical products continues to lag behind regional peers, leaving significant room for further growth, especially with the gradual implementation of the universal healthcare system.

We believe that the ongoing introduction of new meds to the market at higher prices, future revisions in current med prices, Egypt’s low per capita expenditure on pharmaceutical products, along with the implementation of the Universal Healthcare System will support ISPH’s growth, especially if the company was successful in future market share gains.

ISPH is trading at an EV/EBITDA 20f of 8.4x and P/E 20f of 14.6x, which is slightly higher than EM peer group average of 10.1x and 11.4x respectively, mainly on outperforming market growth, extensive market share gains, and lack of exposure to FX risk.