      Recurring net income: EGP199.4mn, -3% Y-o-Y, +54% Q-o-Q, -10% vs. EFGe 
      Revenues: EGP732.1mn, +21% Y-o-Y, +11% Q-o-Q, +2% vs. EFGe 
      EBITDA: EGP253.7mn, -7% Y-o-Y, +16% Q-o-Q, -17% vs. EFGe
 
Egyptian International Pharmaceutical Industries Co. (EIPICO) reported its 1Q18 consolidated results, with headline earnings up 17% Y-o-Y to EGP184mn. However, excluding provisions, FX gains and a one-off EGP50mn contribution to the government’s Drug Support Fund in 1Q17, earnings dipped 3% Y-o-Y to EGP199mn as price-led top-line growth was once again offset by higher raw material costs. Earnings came in 10% lower than our forecast for the quarter on greater-than-expected margin pressure from raw materials and SG&A costs. Revenue growth was still strong, up 21% Y-o-Y, coming in line (+2% vs. EFGe). Local revenues (77% of 1Q18 revenues) rose 34% Y-o-Y, supported by price increases (in Jan 2017, drugs below EGP50 saw a 50% ex-factory price increase, but affected the company from end-2Q17 due to inventory). Meanwhile, exports fell 8%, mainly as translation benefits wore out, in addition to headwinds in key markets Saudi Arabia and Russia. Margins continued to trend downwards, albeit from a high base in 1Q17. Gross profit inched up only 2% Y-o-Y (-6% vs. EFGe), and gross margin contracted c9pp to 45.0%, coming in lower than our forecast of c49%, as raw material costs (c85% of COGS) saw an 81% increase. EBITDA fell 9% Y-o-Y to EGP216mn (-16% vs. EFGe), with the margin narrowing c10pp to 34.6% as SG&A costs were up c29% Y-o-Y as the company is working on expanding its distribution activities to regain market share lost in 2017, in our view. 
 
While 1Q17 serves as a high comparable base, we had expected the price increases rolled out in 2017 to buoy margins somewhat (our FY18 EBITDA margin expectation shows a c80bps contraction in EBITDA margin to 40.3% to reflect inflationary pressures). The company is trading at still-attractive multiples (2018e P/E of 15x and 2019e P/E of c13x), given that earnings are expected to recover on market-wide volume growth (c10-15% per annum) and a superior profitability profile (2017 net margin: c27%; ROAE: c35%; ROAIC: c34%).
 
EIPICO: EGP130.01 as of 16 May 2018, Rating: Buy, TP: EGP165.00/share, MCap: USD575mn, PHAR EY/PHAR.CA
Nada Amin, Hatem Alaa