16-Aug-2017
EIPICO - 2Q17: Earnings double on use of low-cost inventory and one-offs; broadly in line operationally
Rating: Neutral
Target Price: EGP115
Closing Price: EGP136
Earnings hit record-high on margin expansion and below EBIT items
Earnings doubled to EGP230mn in 2Q17, driven by higher margins, investment income, and a one-off item, well above our estimate, mainly due to the booking of a EGP34mn FX gain (related to receivables) and EGP17mn dividends received (for the first time) from its pharma associate in KSA. Recurring earnings (excl. provisions and FX gain) rose 77% Y-o-Y to EGP213mn, 10% below our estimate as EBITDA was mildly lower-than-expected on lower revenue growth. EBITDA grew 57% Y-o-Y to EGP278mn, boosted by revenue growth (+28%) and EBITDA margin expansion (+9pp to 46%, +4pp vs. estimate). Operational growth was driven by: i) price increase on local products in May 2016 and Jan 2017; the latter impact is gradual due to the sale of finished products inventory (2-3 months) at old prices; ii) translation of export revenue at a higher FX rate; and iii) use of low-cost inventory (typically 5-6 months).
Revenue growth still price-driven as volumes fail to recover; market to restore balance in 3Q17
Revenue grew 28% Y-o-Y to EGP 598mn and missed our estimate by 19%. Local sales grew 14% Y-o-Y, due to price increases in May 2016 (+20% retail price of c95% of its medicines) and Jan 2017 (+50% of products contributing 70-80% of its local revenue – gradual impact). The relatively moderate growth suggests lower sales volume; mgmt attributed this to overstocking of some products by pharmacies and expects volumes to improve gradually in 3Q17. We believe the market is also taking time to adjust to the new prices. Export revenue rose 83% (28% of revenue, from 19% in 2Q16) due to FX translation. In USD, exports were slightly down Y-o-Y, but stable Q-o-Q post the slowing downtrend that started in 4Q15; which reflects a weakening in exports to Russia and KSA.
Expect revenue and margins to stabilise at new levels in 2H17
Overall, 2Q17 results were solid, despite fluctuations in volume and margins, which was not a surprise given the magnitude of the Jan 2017’s price increase and impact of raw materials and finished goods inventory. Revenue and margins should start to stabilise at new levels in 2H17 as: i) Jan 2017 price increase will be largely visible in 3Q17 and the May 2016 price increase impact wears off; ii) it will depend almost entirely on raw materials purchased post EGP float; iii) local market stabilise post Jan 2017 price increase; and iv) enhanced competiveness in export markets materialises. We maintain our 2017 estimates for EBITDA (EGP1,132mn vs. EGP549mn in 1H17) and recurring earnings (EGP774mn vs. EGP433mn in 1H17) until local volume and margin trends are confirmed in 3Q17.
Wafaa Baddour, CFA
Adham El Badrawy
Target Price: EGP115
Closing Price: EGP136
Earnings hit record-high on margin expansion and below EBIT items
Earnings doubled to EGP230mn in 2Q17, driven by higher margins, investment income, and a one-off item, well above our estimate, mainly due to the booking of a EGP34mn FX gain (related to receivables) and EGP17mn dividends received (for the first time) from its pharma associate in KSA. Recurring earnings (excl. provisions and FX gain) rose 77% Y-o-Y to EGP213mn, 10% below our estimate as EBITDA was mildly lower-than-expected on lower revenue growth. EBITDA grew 57% Y-o-Y to EGP278mn, boosted by revenue growth (+28%) and EBITDA margin expansion (+9pp to 46%, +4pp vs. estimate). Operational growth was driven by: i) price increase on local products in May 2016 and Jan 2017; the latter impact is gradual due to the sale of finished products inventory (2-3 months) at old prices; ii) translation of export revenue at a higher FX rate; and iii) use of low-cost inventory (typically 5-6 months).
Revenue growth still price-driven as volumes fail to recover; market to restore balance in 3Q17
Revenue grew 28% Y-o-Y to EGP 598mn and missed our estimate by 19%. Local sales grew 14% Y-o-Y, due to price increases in May 2016 (+20% retail price of c95% of its medicines) and Jan 2017 (+50% of products contributing 70-80% of its local revenue – gradual impact). The relatively moderate growth suggests lower sales volume; mgmt attributed this to overstocking of some products by pharmacies and expects volumes to improve gradually in 3Q17. We believe the market is also taking time to adjust to the new prices. Export revenue rose 83% (28% of revenue, from 19% in 2Q16) due to FX translation. In USD, exports were slightly down Y-o-Y, but stable Q-o-Q post the slowing downtrend that started in 4Q15; which reflects a weakening in exports to Russia and KSA.
Expect revenue and margins to stabilise at new levels in 2H17
Overall, 2Q17 results were solid, despite fluctuations in volume and margins, which was not a surprise given the magnitude of the Jan 2017’s price increase and impact of raw materials and finished goods inventory. Revenue and margins should start to stabilise at new levels in 2H17 as: i) Jan 2017 price increase will be largely visible in 3Q17 and the May 2016 price increase impact wears off; ii) it will depend almost entirely on raw materials purchased post EGP float; iii) local market stabilise post Jan 2017 price increase; and iv) enhanced competiveness in export markets materialises. We maintain our 2017 estimates for EBITDA (EGP1,132mn vs. EGP549mn in 1H17) and recurring earnings (EGP774mn vs. EGP433mn in 1H17) until local volume and margin trends are confirmed in 3Q17.
Wafaa Baddour, CFA
Adham El Badrawy