Analysts Upgrade Estimates

FIDSON: Analysts Upgrade Estimates on Solid Earnings Performance

Analysts at Meristem stated that following the upward price review of its products in the fourth quarter (Q4) of 2018, FIDSON recorded low patronage throughout the 2019 financial year.

FIDSON’s top line contracted to ₦14.06 billion. This represents a 13.36% drop from ₦16.23 billion in 2018.

The decline was due to consumer’s cold reaction to the price adjustment as this saw performances across its Ethical and Over-the-counter business segments slump by 13.48% and 12.28% respectively in 2019.

Meristem however stated that the firm’s fortunes have however taken a positive turn since the commencement of 2020.

Analysts Upgrade Estimates

In Q1, revenue improved by 6.04% to ₦3.75 billion from ₦3.53 billion in Q1:2019, after four consecutive quarters of lackluster performances.

Analysts explained that revenue from the ethical unit -prescription drugs- which typically accounts for about 60% of overall revenue, advanced by 11.02% to ₦2.18 billion.

Thus, it solely fueled the growth in overall top-line.

According to analysts, competition within the generic medicine market intensified, and this resulted to a marginal revenue drop (-0.04%) in revenue from the Over-the-Counter Unit.

Going forward into the next quarters, Meristem stated that the essential nature of medical supplies and products, amidst the Coronavirus pandemic puts the firm at a vantage point to grow sales volume.

Coupled with that is the potential for capacity expansion off the back of concessionary credit and intervention funds made available by the Central Bank for Pharmaceutical firms, Meristem explained.

Premised on these, Meristem’s analysts said they are anticipating a solid revenue growth of 15.61% to ₦16.28 billion in 2020.

Meanwhile, it was observed that FIDSON puts a lid on costs in the period.

Cost-to-sales improved to 58.28% in 2019 – although a lot higher than its six-year average of 45.85%- from 61.06% in 2018.

This was driven by a moderation in the major items of direct costs like raw materials, energy and factory overheads.

Again, FIDSON reported a further moderation in direct costs to ₦2.03 billion in Q1:2020, driving cost-to-sales lower to 54.00% from 57.76% in Q1:2019.

Energy cost contributed significantly to the improvement in the overall costs, as it sloped down by 28.27% as the firm continues to benefit from its transition to cheaper energy sources.

Consequently, analysts stated that gross margin improved to 46% from 42.24% in the corresponding quarter last year.

In a bid to drive sales volume, the firm invested significantly in advertisement and sales expenses which surged by 110% to ₦607 million.

This happened to its highest quarterly spending since Q1:2018.

However, analysts explained that this muted the impact of the cost savings on direct costs, causing a contraction in operating margin to 14.79% from 17.12% in Q1:2018.

Meristem stated that in the near term, lockdown measures employed worldwide could impede the ease of importing raw materials.

Also, the firm added that the congestion at the seaport has only gotten worse, posing potential risks to logistics costs.

“While we anticipate an increase in direct costs, our 15.61% revenue projection is expected to provide succor, moderating cost-to-sales to 55.44% in 2020”, analysts at Meristem stated.

Reaping the Benefits of Balance Sheet Restructuring

In 9-month of financial year 2019, FIDSON paid down 79.63% of its short-term obligations, easing the pressure on finance costs and eventually, earnings.

The firm continued reaping the benefits of its restructuring as finance costs declined further in Q1:2020 to ₦331 million.

This was on the back of a 12.92% reduction in short-term loans to ₦3.14 billion. Consequently, interest cover improved slightly to 1.67% from 1.54% in Q1:2019.

Meristem Securities stated that there is a possibility for further reduction given the ongoing access to concessionary loans and CBN intervention funds for working capital and term loan purposes.

Based on these, analysts at Meristem said they are anticipating a further moderation in finance costs, allowing earnings before interest and tax (EBIT) to trickle down to bottom-line.

Meristem forecasts an increase in PAT to ₦881 million in 2020, which implies a net margin of 5.42% from 2.21% in 2019.

Premised on the above, analysts at the firm stated that the firm’s target price has been revised upwards to ₦4.01 on the back of a target price earnings of 9.5x and an expected EPS of ₦0.42.

“We, therefore, recommend a BUY Rating on the ticker”, Meristem stated. FIDSON: Analysts Upgrade Estimates on Solid Earnings Performance.