Equity Analysis /
Pakistan

The Searle Company: Acquiring shareholding in OBS Pakistan, another feather in its cap

    Yusra Beg
    Yusra Beg

    Senior Investment Analyst

    Intermarket Securities
    24 September 2019

    Acquisition details

    SEARL issued a notification today, that the Board of Directors have in principal approved the acquisition of 51% to 100% control of OBS Pakistan (Private) Ltd. This transaction may take place through the potential acquisition of Luna Pakistan, which we understand acquired OBS a few months ago, and which is reportedly SEARL’s associated concern. Given that the transaction has not yet been finalized and its size is not yet determined, it is difficult to pass comment on the capital structure to finance the acquisition. That said, we expect a combination of debt and rights share issuance likely to take place.

    About OBS Pakistan

    OBS Pakistan is one of Pakistan’s top corporations in the healthcare segment and is a leading producers of iron sucrose injections (brand name: Venofer) which contributes c. 25% to the overall topline. OBS has a relatively small drug portfolio where top 5 drugs contribute c. 60% to the overall topline, all of which fall in the National Essential Medicines List. These are primarily concentrated in the following segments: Nephrology, rheumatology, cardiovascular and antibiotics, etc. The portfolio is likely to increase SEARL’s presence in the scheduled drugs category (currently c. 55% of SEARL’s pharmaceutical sales are derived from scheduled drugs).

    SEARL remains a preferred play in the listed pharma space

    SEARL has a grown at a 22% 5-year sales CAGR, accompanied with strong translation to the bottom-line (5-year NPAT CAGR: 30%). This aforementioned acquisition falls in-line with SEARL’s growth strategy, having recently acquired the distribution and marketing rights for several flagship brands of Reckitt Benckiser (Gaviscon, Disprin, Bonjela, etc.).

    Valuations are undemanding

    SEARL has shed c 40% CYTD following sharp PKR devaluation (Dec’17-to-date: 32% vs. the US$). That said, we believe that the currency has now stabilized, and we expect gross margins to stabilize at c 50% going forward (1H19: 53.1%). SEARL trades at a FY20f P/E of 10.6x and a P/S of 1.4x while offering a 30% upside to our Jun’20 TP of PKR188/sh. We have a Buy rating on the name.