Earnings declined by 6% yoy. Despite 11% yoy top line growth, ACME missed earnings expectation by 9%. Main reasons are lower gross margin (-138bps) by rising raw materials costs and an increase in interest expenses. Improvement in the effective tax rate to 16.5% (-621bps yoy) partially offset the impact.
Reiterate Buy (ETR 43.5%). ACME trades at 9.8x 2020f PE, 5.6x 2020f EV/EBITDA, 1.4x 2020f EV/Sales and appears over-penalised for its plateauing bottom line and the delay in its promised expansion. The company has started a trial run of its Steroid-Hormone and Penicillin project which we expect to start its commercial operation in July 2019. We expect the project to be a major catalyst for the stock and hence reiterate our Buy rating.
The capacity expansion continues. ACME seems to be increasing capacity further on top of its planned 40% capacity expansion by BDT 1.5bn as fixed assets of the company have increased by BDT714mn qoq. These additional investments increased ACME’s debt level to BDT12.2bn (+14% qoq, +47% yoy). Leverage condition also deteriorated as the debt to equity increased from 0.71x to 0.76x and the coverage ratio decreased from 2.6x to 2.2x on qoq basis. We think ACME is relying too much on debt to generate growth and it might affect its profitability significantly if the projects do not start operation timely. Also, the company is putting too much effort into increasing capacity rather than developing brand equity.
An uptick in working capital. Working capital cycle increased to 162 days (+8 days qoq) because of inventory increase (+9 days), marginally offset by payables increase (+1 day).
Risks to our target price and recommendation. Sub-par top line growth and a delay in project implementation suggest that the company has plenty of scopes to improve its efficiency. Unless such improvement takes place, we expect sub-par revenue growth (10%) for ACME compared to the industry (14%).