• Cut FV to EGP83; trades at a large discount to peers We cut our FV to EGP83 to reflect: i) higher CoE on rising risk free rate; and ii) our lower margin forecasts due to the impact of higher raw material costs post-EGP weakness. However, we expect a relatively moderate hit to profitability as export sales cover 80-85% of the imported raw material bill. Our FV implies 38% upside potential; hence, we reiterate our Buy rating. EIPICO’s share price is down 15% YTD, despite boasting Y-o-Y revenue and earnings growth in 2015, and underperforming the market that recovered recently (+10% YTD). EIPCO trades at a 2016e P/E of 12.7x, and the share price sell-off widened the valuation gap to regional peers (17.4x) and global peers (c23.5x), despite its attractive dividend yield of c6% and higher profitability.
• Expect double-digit revenue and earnings CAGR We forecast double-digit revenue growth from local (+11% Y-o-Y on base effect) and export sales (+16%) in 2016 as EIPICO expects: i) stronger product additions, around 17 new drugs (versus seven in 2015), of which seven were delayed from 2015 (as the Ministry of Health applied more stringent tests on new products); and ii) spill-over impact from price increase on some drugs in 2015 (to contribute 7% of EIPICO’s revenue) and expected further price increase in 2016. We expect modest earnings growth of 5% Y-o-Y in 2016 on lower EBITDA margin (-130 bps Y-o-Y). We forecast 2015-19 earnings CAGR of c12%, largely revenue-driven.
• Raw materials cost hike leads to drug shortage; more price rises likely soon Pharmaceutical sales in Egypt grew 13% Y-o-Y in 2015 to EGP32 billion, fuelled by a shift to expensive medicines due to a shortage in cheaper alternatives, while volume growth was modest at low single-digits, according to market studies. The shortage was driven by a hike in EGP-denominated raw materials cost (mostly due to EGP weakness) that was not offset by higher prices in a timely manner. Thus, companies lowered production and stopped producing some of the cheaper products. In 2015, the government approved price increases for some drugs and the recent EGP devaluation will likely lead to further price rises. The Chamber of Pharmaceutical Industries has recently reached an agreement with the Ministry of Health to allow for raising medicine prices through decrees that will soon be issued.

Tarek El-Shawarby