Equity Analysis /
Egypt

IbnSina Pharma: Solid topline growth; operational efficiencies support margin progression

    Mohamed Hamza

    Volume-driven growth stirring topline growth

    ISPH reported a 29% YoY surge in revenues. Revenue growth was driven by 17% YoY growth in volumes sold, supported by 23% and 5% YoY increase in clients and deliveries, respectively. ISPH’s business segments recorded enhanced YoY performance, which resulted in market share increasing to 19.7% in 1Q19 from 18.7% in 1Q18 :

    • Pharmacy sales (69.5% of total sales) increased by c29% YoY.
    • Wholesaler sales (12.1% of total sales) increased by c4% YoY. 
    • Tender sales (11.6% of total sales) increased by c57% YoY.
    • Hospitals sales (3.6% of total sales) increased by c93% YoY.
    • Personal care sales (2.9% of total sales) increased by c10% YoY.
    • Third-Party Logistics sales (0.4% of total sales) increased by c72% YoY.

    We believe the 5% QoQ drop in sales is due mainly to seasonality, where pharma-manufacturing companies offer distributing companies, such as ISPH, year-end bonuses. Therefore, ISPH records its highest revenues in every fourth quarter of each year. 

    Weaker sequential margins vs Healthier annual margins

    On a quarterly basis, GP and EBITDA margins decreased from 8.1% and 4.5%, respectively in 4Q18 to 7.9% and 3.9%, respectively in 1Q19.

    On an annual basis, GPM recorded 7.9% in 1Q19 vs 7.5% in 1Q18, on the back of improved topline. EBITDA margin increased to 3.9% in 1Q19 from 3.1% in 1Q18 as a result of higher operational efficiency levels via 1) revenue/site increasing by 23% YoY, 2) revenue/vehicle increasing by 21% YoY, 3) revenue/employee increasing by 21% YoY, 4) SG&A/Sales dropping to 4.2% in 1Q19 vs 4.5% in 1Q18. Despite the increase of general provision and net interest expense balance by 205% and 63% respectively, ISPH recorded a higher NPM of 1.1% in 1Q19 vs 1.0% in 1Q18. 

    Anti-trust case developments

    In April 2019, management filed an appeal to lower its anti-trust case fine of EGP160 million (if rejected, maximum fine would still stand at EGP160 million). In ISPH’s recent BoD meeting, management approved to payout the EGP160 million before the final verdict, which does not preclude ISPH from reimbursement, in the case where the court annuls or lowers the fine payment. 

    Healthy capex; Maintain OW

    ISPH’s 1Q19 capex outlay closed at EGP86.6million vs EGP45.0 million in 1Q18 (+92% YoY), with 62% allocated to new distribution sites (adding 4 new distribution centers with a total of 59 sites), 12% to technology upgrades, 12% to maintenance, 11% to new vehicles (adding 50 new vehicles YoY) and 3% to new headquarters. 

    Management announced a cash dividend of EGP0.07/share, implying a DIY of 0.6%; to be disbursed on May 19, 2019. Management also approved to increase its issued and paid-in capital from EGP180.5 million to EGP205 million via a 0.14:1 bonus share. 

    ISPH is trading at an EV/EBITDA19 of13.4x and P/E19 of 26.6x, which are above the market average of 8.8x and 15.2x, respectively. Nevertheless, ISPH is trading at a premium to peers essentially because it offers the best exposure to the pharma sector in Egypt, but without any FX risk. ISPH outpaced market sales growth by more than 5pps (29% vs 24%). With continuous market share gains as well as eventual revisions in med prices, the implementation of the Universal Healthcare System and increased demand (supported by population growth of 2% annually and industry-level volumes sold increasing by 9% YoY), we project ISPH to continue achieving its notable topline growth in the coming periods. Therefore, we maintain our Overweight recommendation.