Earnings Report /
Pakistan

The Searle Company: Q3 FY 20 review: Better cost control leads to earnings beat

  • SEARL posted Q3 FY 20 NPAT of PKR610mn (EPS: PKR2.87), up 29% yoy and 8% qoq

  • Better-than-expected results due to (i) lower SG&A expenses and (ii) lower-than-expected finance costs

  • We expect the full impact of the Covid-19 led spike in demand for essential medicines to be reflected in Q4 FY 20

Yusra Beg
Yusra Beg

Senior Investment Analyst

Follow
Intermarket Securities
27 April 2020

SEARL posted 3QFY20 NPAT of PKR610mn (EPS: PKR2.87), up 29%yoy and 8%qoq. This takes 9MFY20 NPAT to PKR1,722mn (EPS: PKR8.11), down 3%yoy. The result is better than our projected EPS of PKR2.54 led by (i) lower SG&A expenses and (ii) lower-than-expected finance costs. While sales are a high PKR5,214mn, margins have thinned sequentially, leading to an inline gross profit. SEARL has not announced dividends, which is in line with expectations. 

Key highlights:

  • Revenue of PKR5,214mn in 3QFY20 (up 13%yoy, 6%qoq) is higher than our projected sales of PKR4,925mn. We attribute this partly to quarter-end rise in sales leading up to the Covid-19 lockdown and some element of seasonality.
  • Despite the sequential rise in sales, gross profit has remained stable at PKR2,424mn in 3QFY20 (vs. PKR2,442mn in 2QFY20), in-line with estimates. This is perhaps due to seasonally higher sales of relatively low margin products and rise in essential medicine sales. Margins are therefore mostly stable at 46.5% in 3QFY20 vs. 46.9% in SPLY, but much lower compared to 49.6% in 2QFY20. 
  • Cost control is evident, where sequentially lower SG&A expenses (down 10%qoq and2%yoy) further corroborate higher sales of low margins brands in 3Q. 
  • Finance costs have come off by 15%qoq but have jumped 78%yoy (albeit coming from a low base) 
  • The effective tax rate has risen to 30.9% vs. 27.9% in 2QFY20 and 23% in SPLY.

We expect the full impact of the Covid-19 led spike in demand for essential medicines to be reflected in 4QFY20. SEARL has shed 4.9% CYTD and trades at a FY20f P/E of 17.0x. We have a June 2020 TP of PKR198/sh, Buy.