18-May-2017
EIPICO - 1Q17: Strong start to the year; ahead on a recurring basis
Rating: Neutral
Target Price: EGP115
Closing Price: EGP105
Robust operational growth partly mitigated by one-off donation; remain Neutral for now
1Q17 recurring consolidated earnings surged 62% Y-o-Y to EGP220mn, driven by: i) May 2016 price increase to local products; ii) translation of exports (28% of total revenue) post EGP devaluation; iii) raw materials inventory (about six-months); and iv) likely a better revenue mix. Revenue growth (22% Y-o-Y) was in line, while recurring earnings were 29% ahead on better EBITDA margin (45%, +9pp Y-o-Y, +5pp vs. estimate) and interest income. On a reported basis, earnings grew 28% Y-o-Y to EGP158mn, pulled down by the booking of EGP50mn contribution to the government’s Drug Support Fund. Although recurring results came in ahead of our estimates, we maintain our Neutral rating and full-year estimates until trends are confirmed, as we expect volatility in upcoming quarterly results as production and sales volume return to normal levels, low-cost inventory of raw materials depletes, and sales at new prices gradually kick in – drugs produced (two-months stock) prior to mid-Jan price increase were sold at old prices.
Price-driven local revenue growth; exports benefit from weaker EGP
Local revenue growth decelerated to 9% despite May 2016 price increase (+20% to retail price of c95% of EPICO’s medicines), which suggests a softening in volumes (likely due to lower production earlier in the year, in anticipation of 2017’s price increase). The impact of mid-Jan. price increase (+50% for products contributing c70-80% of EIPICO’s local revenue) will start to be notable in 2Q17. Export revenue surged 76%, driven by weaker EGP. In USD terms, exports were lower Y-o-Y, but started to recover Q-o-Q from the downtrend in previous quarters (due to lower sales to Russia and Saudi Arabia). We view the Q-o-Q improvement in export sales positively; enhanced competitiveness on EGP weakening should materialise gradually, as clarified by management.
Our full-year forecasts look achievable; better pricing impact on margins key upside
We keep our forecasts for the full year for now, with revenue growth of 45%, driven by mid-Jan. price hike, higher EGP-denominated exports and gradual volume recovery. This, and low-cost inventory and moderate increase in salaries (until now), would mitigate the negative impact of inflationary pressure on margins, leaving EBITDA margin estimate at 39.7% (-1.4pp). We forecast recurring earnings growth of 48%. A better-than-estimated EBITDA margin and another round of increase in drug prices are main catalysts. Our forecasts factor in a 50% price increase beginning of 2018 for products that have not seen an increase in Jan. 17.
Wafaa Baddour, CFA
Adham El Badrawy
Target Price: EGP115
Closing Price: EGP105
Robust operational growth partly mitigated by one-off donation; remain Neutral for now
1Q17 recurring consolidated earnings surged 62% Y-o-Y to EGP220mn, driven by: i) May 2016 price increase to local products; ii) translation of exports (28% of total revenue) post EGP devaluation; iii) raw materials inventory (about six-months); and iv) likely a better revenue mix. Revenue growth (22% Y-o-Y) was in line, while recurring earnings were 29% ahead on better EBITDA margin (45%, +9pp Y-o-Y, +5pp vs. estimate) and interest income. On a reported basis, earnings grew 28% Y-o-Y to EGP158mn, pulled down by the booking of EGP50mn contribution to the government’s Drug Support Fund. Although recurring results came in ahead of our estimates, we maintain our Neutral rating and full-year estimates until trends are confirmed, as we expect volatility in upcoming quarterly results as production and sales volume return to normal levels, low-cost inventory of raw materials depletes, and sales at new prices gradually kick in – drugs produced (two-months stock) prior to mid-Jan price increase were sold at old prices.
Price-driven local revenue growth; exports benefit from weaker EGP
Local revenue growth decelerated to 9% despite May 2016 price increase (+20% to retail price of c95% of EPICO’s medicines), which suggests a softening in volumes (likely due to lower production earlier in the year, in anticipation of 2017’s price increase). The impact of mid-Jan. price increase (+50% for products contributing c70-80% of EIPICO’s local revenue) will start to be notable in 2Q17. Export revenue surged 76%, driven by weaker EGP. In USD terms, exports were lower Y-o-Y, but started to recover Q-o-Q from the downtrend in previous quarters (due to lower sales to Russia and Saudi Arabia). We view the Q-o-Q improvement in export sales positively; enhanced competitiveness on EGP weakening should materialise gradually, as clarified by management.
Our full-year forecasts look achievable; better pricing impact on margins key upside
We keep our forecasts for the full year for now, with revenue growth of 45%, driven by mid-Jan. price hike, higher EGP-denominated exports and gradual volume recovery. This, and low-cost inventory and moderate increase in salaries (until now), would mitigate the negative impact of inflationary pressure on margins, leaving EBITDA margin estimate at 39.7% (-1.4pp). We forecast recurring earnings growth of 48%. A better-than-estimated EBITDA margin and another round of increase in drug prices are main catalysts. Our forecasts factor in a 50% price increase beginning of 2018 for products that have not seen an increase in Jan. 17.
Wafaa Baddour, CFA
Adham El Badrawy