FIDSON Healthcare Primed for Gains as ‘Virus’ Boosts Earnings
FIDSON Healthcare Plc is primed for more gains as coronavirus outbreak impacts demands, augments sales for healthcare products.
Due to positive feel, analysts at Meristem Securities has placed a ₦6.25 per share as fair value for the company’s share.
This indicates that the stock is undervalued when compare with current, market price.
In the stock market, FIDSON’s share was priced at ₦2.85 on Friday, having dropped off from ₦3 it had peaked in the 7-day trading session.
By estimate, the Pharmaceutical firm has a sustainable growth rate of 6%, and it current market capitalisation settled at ₦5.946 billion.
FIDSON’s earnings have been projected to increase on the back of the company’s relevance in the health sector due to COVID-19 outbreak.
Like its peers, the company earnings would ride on the COVID-19 momentum, based on this analysts upgrade revenue projection.
Equity research analysts at Meristem Securities estimate 17.14% increase in 2020 turnover to ₦16.47 billion.
Unaudited result for Q1 2020:
In the first quarter of 2020, FIDSON revved up revenue by 6% from ₦3.537 billion in the first quarter of 2019 to ₦3.751 billion.
Its cost of sales slowed down and settled at ₦2.025 billion, leaving gross margin at ₦1.725 billion from ₦1.494 billion in 2019.
The management was able to reduce administrative expenses by 6.3%, but selling and distribution overheads skyrocketed.
In the period, administrative expenses dropped from ₦658.433 million in Q1 2019 to ₦617.018 billion a year after.
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This happened despite steep rise in inflation rate, but was absorbed in selling and distribution expenses which lifted 110% from ₦288.402 million to ₦607.081 million.
In its unaudited Q1 result, FIDSON said that inventory write off valued at ₦89.937 million and promotion and advertisement valued at ₦441.548 million drove selling expenses.
The company’s closed the Q1 2020 with total profit of ₦151.598 million, which was 4.6% above ₦144.894 million reported in Q1 2019.
Profile:
FIDSON is unarguably, one of the leading pharmaceutical firms in Nigeria and Sub-Saharan Africa.
It has achieved recognition, having pioneered a decent deal of breakthroughs in the Nigerian pharmaceutical industry, one of which include its ground-breaking production of Anti-retroviral drugs in Sub-Saharan Africa.
Meristem explained that the firm currently has an estimated 6% market-share in the pharmaceutical industry producing over 150 different products that address several therapeutic and treatment classes typical to the Nigerian populace.
Though, it started out as a local distributor of pharmaceutical products, FIDSON has grown to become a force to reckon in the health sector.
Business Segment:
FIDSON delivers on three major brand categories most of which have become household names within the borders of Nigeria.
Chief among its brands are the multivitamins and antibiotic product line with which it has secured its position as a giant in the industry and with a growing market share.
The firm’s products are sub-divided into two segments: Over-the-Counter Unit (non-prescription medications, which typically contributes an average of 58.36% to overall revenue) and the Ethical Unit (prescription products).
Following the completion of its WHO compliant factory, the firm doubled up on installed capacity, achieving an average utilization rate of 75% and 71% in the infusion and pharma- plants.
Meristem said one chief enabler of revenue growth has been intravenous fluids which has gained momentous traction, contributing an average of 15% to overall revenue on the back of the product’s high demand.
With a compounded annual growth rate of 14.59% between 2012 and 2018, FIDSON has habitually churned out impressive top-line, analysts said.
This has been the pattern despite soaring competition, save for 2015 and 2016 (during the economic downturn) economic downturns and soaring competition.
Analysts said revenue growth resumed on its double digits track in 2017, grew by 83.64% to ₦14.06 billion from ₦7.66 billion in 2016.
This was followed by an impressive revenue growth of 15.45% in 2018, amounting to ₦16.23 billion.
Meristem said the increase in sales volume, due to demand steadiness has been the main driver of growth considering the supply-demand gap for medications in Nigeria.
The ethical unit made its debut as a growth driver, accelerating by 35.56% to deliver revenue worth of ₦9.09 billion from ₦6.71 billion in 2016.
However, Price reduction by other market players in the generics space (OTC) triggered a decline in revenue from the unit during 2019.
In 2019:
In its most recent financial scorecard, FIDSON reported a 13.36% decline in revenue from ₦16.23 billion in 2018 to ₦14.06 billion in 2019.
Analysts explained that revenue began to thin out in the first quarter when the firm’s management repriced its products upwards.
Cold reaction to this by consumers resulted in weaker volumes across the business divisions, as consumers shifted to cheaper alternatives and substitutes, Meristem stated
The Over the Counter (OTC) business unit which contributes the most to the group’s top-line, average of 56.5% in five years, recorded a decline in revenue of 7.59% to ₦6.70 billion, from ₦6.19 billion in 2018.
Meanwhile, its Ethical division also took a hit, contracted by 8.36% to ₦7.87 billion from ₦8.58 billion the previous financial year.
“We acknowledge that it would take longer for consumers to get accustomed to the upward review in prices and the firm might have to invest in promotions and advertising to drive volumes”, Meristem Securities stated.
However, analysts stated that the COVID-19 outbreak is expected to drive product volumes regardless of prices.
In the long run, the employment of other tactical strategies – Government partnerships, new products, research and development – should offset the impact of the product price increase.
“We expect revenue to rise by 17.14% year on year by 2020 to ₦16.47 billion”, analysts explained.
Meristem said with an average cost-to-sales ratio of 48.02% in five years, FIDSON has demonstrated some levels of cost efficiency relative to its industry peers.
Since 2012, the ratio hovered between 43% and 49% before hitting record high of 61.06% in 2018 from 49.10% in 2017.
The firm experienced substantial setback in the import of raw materials from China.
The Chinese Government interrupted production in about 40% of Chinese factories on the back of defaulting environmental pollution regulations.
Meristem said this resulted in import disruption, causing firms like FIDSON to source raw materials elsewhere.
Hence, the spike in cost-to sales to 61.06%.
Complementing the importation hurdles, is the Apapa gridlock which has been a thorn in the flesh for most manufacturing firms.
Analyst explained that the difficulties in transporting raw materials from the port to the factory, increased the pressure on logistics cost.
In line with the drop-in revenue in 2019, direct costs contracted by 12.70% to ₦8.65 billion from ₦9.91 billion in 2018.
Meanwhile, FIDSON reported significant decline in cost of sales across both business divisions as costs from the Ethical and over the-Counter business units dropped by 23.16% and 11.67% respectively.
Explaining further, Meristem stated that a number of shared expenses such as energy and factory overheads also declined by 28.84% and 43.18% respectively.
Consequently, the cost-to-sales ratio settled lower at 58.28%, from 61.06% in 2018.
The 38.27% decline in logistics cost drove overall operating expenses down by 10.90% to ₦4.03 billion.
The largest cause of concern has been the firm’s stock of debt, Meristem stated.
Finance charges to revenue has been on a steady rise, hitting an all-time high of 11.86% in 2018 from 7.13% in 2017.
Sequel to the construction of its biotech plant, FIDSON accumulated series of interest-bearing debts, bringing the firm’s total debt to ₦5.83 billion from ₦2.99 billion in 2017.
Meristem recalled that in a bid to deleverage, the firm carried out a rights issue in April 2019, the proceeds of which it used in settling about 30% of its outstanding obligations.
During financial year 2019, the firm restructured its balance sheet, paying down a significant portion of its short-term obligations.
As a result, short-term interest-bearing debts declined by more than half 57.80%, to ₦1.99 billion from ₦4.71 billion in 2018.
Consequently, finance costs dipped by 10.81% to ₦1.72 billion, further easing the pressure on bottom-line.
Given the reduction in current liabilities, the current ratio improved to 1.69x from 0.72x in the corresponding period.
Analysts said interest coverage ratio also inched upwards slightly to 1.23x from 1.06x in 2018.
“In 2020, we expect the FIDSON to maintain the momentum, putting a lid on short-term obligations to reduce the pressure on its earnings.
“Against this backdrop, we are projecting a bottom-line of ₦9.31 million, which implies a net margin of 5.66% from 2.21% in 2018”, analysts stated.
Meristem however revised its 2020 target price upwards to ₦4.05 using an Expected EPS of ₦0.45 and target price earnings of 9.0x.
FIDSON Healthcare Primed for Gains as ‘Virus’ Boosts Earnings
