A rising star
We initiate coverage on RMDA at a FV of EGP5.50/share, and an Overweight recommendation, implying an upside of 16.8%. RMDA is considered one of the fastest growing pharmaceutical companies in Egypt, recording a revenue CAGR of 43% over 2016-2018 versus a market CAGR of 27% over the same period. RMDA has managed to retain a market share of c.1.0% in a highly fragmented market the last 3 years up from 0.5% in 2010 and to position itself amongst the top 25 generic pharmaceutical manufacturers in Egypt. The superior revenue growth model rests on successful molecule launches, whether acquired or internally developed. RMDA has 71 molecules currently marketed which translate to a portfolio of 105 products. The company has a pipeline of 118 molecules for pharmaceutical drugs (1.7x currently marketed molecules).
Hard work pays off
The company’s performance in 2019 was adversely affected by all the expansions and upgrades that took place over the last two years. Now that all expansion works have come to an end, the renovated production facilities operate at a capacity utilization rate of 34% across 20 production lines, ready to cater for complete in-house production as well as new toll manufacturing agreements. In our view, going forward, RMDA will continue to show outstanding revenue growth, growing at a CAGR of 23% over our forecast horizon and expand its market share, reaching c.1.6% in 2023, as per our estimates. We expect healthy margins going forward on account of new molecule launches and the capitalization on the increased production capacity coupled with improving sector dynamics and health-awareness focused government programs. We expect gross profit margins to recover, recording a GPM of 50% in 2020 and 52% in 2024. However, this accretive growth and margin expansion needs to be coupled with higher efficiency and shorter cash conversion cycle, with high focus on value creation.
RMDA trading at par with emerging market peers
Based on our estimates, RMDA is trading at FY20 P/E of 19.5x and EV/EBITDA of 10.0x which is at par to emerging market peers P/E multiple of 19.5x, and at a slight discount to the peer group average EV/EBITDA of 12.6x. We have used regression to calculate the relative value for the stock, which take into account the difference in EPS growth and EBITDA margin between peers, yielding a relative valuation of EGP5.73/share (+22% upside), which is close to our DCF value of EGP5.50/share.