SPIMACO reported KPIs for 4Q18 with earnings down 78% Y-o-Y to SAR12.8mn, missing our estimate by 70%, mainly on the back of a large Y-o-Y revenue decline as well as higher net interest costs as per the company’s disclosure. Headline earnings for FY2018 declined 32% Y-o-Y to SAR100.8mn but the company noted some restatements for 2017 including: i) removal of a SAR46mn capital gain on the sale of Yansab (1Q17) from the P&L, which was instead recorded in the statement of comprehensive income; and ii) restatement of losses from an associate – we believe this is likely related to the Saudi associate under investigation for suspected forgery of some client contracts (preliminary estimate: cSAR27mn). Excluding these restatements, earnings declined c82% Y-o-Y in 4Q17 and c51% for FY2018.
Top-line fell 12.9% Y-o-Y (-28% vs. EFGe) in 4Q18 continuing its double-digit decline for the second quarter in a row, which we believe was due to weak demand in KSA (expat departures, etc.), lower export sales (c13% of 2017 top-line) and a decline in revenue from its hospital in Qassim. The outcome is disappointing given sizeable capacity expansions with SPIMACO’s SAR212mn greenfield Dammam Pharma plant (320mn units; to breakeven in 2-3 years) starting commercial ops in 1Q18.
The top-line miss was exacerbated by a c10.6pp gross margin contraction to 39.8% (EFGe: 47.5%), most likely on product mix; as the company has been increasing its public sector sales that have a lower gross margin.
The company’s BoD had proposed DPS of SAR1.0 (total of SAR120mn) for 2H18, bringing the total DPS for 2018 to SAR1.5 (total of SAR180mn) coming ahead of our forecast (EFGe: SAR1.0) and higher than the SAR1.0 paid out in 2017. The annual dividend implies a payout ratio of 179% and a dividend yield of 5.5%.
Overall a very disappointing set of results with the continued significant revenue decline being quite alarming. We have a Neutral rating on the stock but we will be revising our numbers to reflect the results.
Hatem Alaa, CFA, Ahmed Moataz