May & Baker: Equity Analysts Upgrade Stock on COVID-19 Advantage

May & Baker: Equity Analysts Upgrade Stock on COVID-19 Advantage

May & Baker Nigeria (M&B Plc) was the first pharmaceutical firm to set up an anti-retroviral plant in Nigeria and the first to initiate local vaccine production.

In the Nigerian Stock Exchange, investors think the company is only worth ₦4.796 billion on Wednesday as share price trades at ₦2.78. But Meristem Securities is rather bullish on M&B, noting the company’s relevance at the time of the global coronavirus pandemic.

Equity research analysts estimate ₦3.52 per share as a price target for the stock in 2020. Also, the Company’s revenue is projected to grow 9% to ₦8.81 billion on account of its relevant position at the time of COVID-19 pandemic.

Meanwhile, the firm’s financials have been largely disappointing, but things are taking a new turn with COVID-19 on the streets.

In 2018, the company divested its foods segment, and this hurt earnings in the subsequent year, though its reason was to remain focused.

The Pharmaceutical has come back to the limelight, and analysts are predicting an upbeat earnings outlook, though the company’s market capitalisation has plunged enough.

The company’s focus has been on the production and distribution of pharmaceutical products, after the divestment of food segments.

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Unknowingly, in what consultants term as strategic error, divested units was a star to the company’s earnings portfolio.

Meristem stated in a note that the Pharmaceutical firm owns a plant with the capacity to produce in excess of six (6) billion tablets and forty nine (49) million bottles of liquid preparations per annum for a range of over 80 products.

Recalled that the World Health Organization certified M&B Plc. as a pharmaceutical firm with adequate facilities and processes that meet global current Good Manufacturing Practice.

According to Meristem, the certification puts the firm on a platform to participate in international tenders for medicines against the three major pandemics in Africa- HIV, Malaria & Tuberculosis.

Before Divestment:

In previous years, May & Baker operated three business lines: pharmaceutical, food and beverage lines. Food brand, Minimee Chin-chin and Minimee Noodles was sold to Dufil Prima Foods for ₦775 million. Analysts stated that the payment transferred the ownership of the Noodles factory, the equipment and the trademark of the Minimee brand to Dufil Prima Foods.

Now, everybody eats Minimee Chin-Chin and Minimee Noodles. However, in a bid to achieve efficiency, productivity and profitability, the firm divested from the food business in 2018. In June 2018, M&B obtained a Federal Executive Council license to partner with the National Institute of Pharmaceutical Research and Development (NIPRD) in the production of NIPRISAN- a sickle cell management drug.

The commercialization of this product is expected to further drive sales volume upwards, increase brand recognition and essentially increase profitability to the magnitude of sales growth.

“It is worthy of note that the firm has an ongoing joint venture with the Federal Government for the local production of vaccines”, equity research analysts explained. The Federal Government holds 49% of the joint venture while May & Baker holds 51% of the company – Biovaccines Nigeria Ltd.

Divestment Hurts Earnings

Over a review period of five years from 2013 and 2017, the Company’s top-line grew at a compound annual growth rate (CAGR) of 5.06%. However, following the divestment of the food business in 2018, the segment that previously contributed about 25% to total revenue, topline hit a brick wall for the first time in five years.

Its revenue contracted by 8.56% to ₦8.55 billion from ₦9.35 billion in 2017.

The decline in top-line persisted into the 2019 financial year as turnover dipped by 5.52% to ₦8.08billion from ₦8.55 in 2018.

Meristem said the top line mirrored the gloomy performance in the pharmaceutical business segments which contracted to ₦8.48 billion from ₦8 billion in 2018.

Analysts are of the view that intense competition in the Over-the-Counter (OTC) market, counterfeiting, increased adoption of alternative medicines and reduced consumer spending, all contributed to the southwards slope in the topline. Nonetheless, analysts said the beverage unit showed some resilience, jerked up by 9.58% to ₦77.18 million.

“We expect top-line to grow by 11.48% as demand for drugs and medical supplies increase during the COVID-19 pandemic”, Meristem said. Equity analysts explained that M&B is in a vantage position as it has existing partnerships with the Government. In addition, the firm has been approached by the NAFDAC to produce an emergency stock of chloroquine.

Against these premises, Meristem Securities forecasts revenue of ₦8.81 billion, implying 8.99% in 2020. During the 2019 financial year, direct costs inched lower by 4.14% to ₦5.17 billion, driven by a decline in raw material costs to ₦4.25 billion, from ₦4.87 billion in 2018.

The firm also recorded a 5.80% decline in operating expenses to ₦7.16 billion as against ₦7.60 billion in 2018, driven by a significant contraction in personnel expenses. However, the decline in revenue filtered into operating profit, resulting in a 14.84% increase to ₦1.03 billion.

In 2018, M&B conducted a rights issue exercise.

From the proceeds, 17.8% was set aside as equity contribution to Biovaccines- its joint venture with the Federal Government. Of the remaining, 16.3% was used to reduce its short-term debt, 20.5% went to working capital, marketing/Brand building took 20.4% and 22.1% was allocated for capital expenditure.

As a result, the company’s finance costs slumped by 33.67% and 64.90% in 2018 and 2019 respectively. Analysts said a combination of a decrease in direct costs, operating expenses and finance costs resulted in an improvement in bottom-line to ₦716.44 million in 2019.

“While we anticipate an uptick in costs, our revenue growth forecast should sufficiently deliver growth in earnings of 17.56% to ₦746 million”, analysts at Meristem stated.

Meristem stated that its forecast implies a net margin of 8.47% from 7.85% in the corresponding period last year. Meristem revised its target price upwards to ₦3.52 on the back of a target price-earnings of 8.0x and expected earnings per share of ₦0.44.

Analysts said: “This represents a 15.41% upside to its closing price of ₦3.05 on May 19. Therefore, we recommend the ticker as BUY”.

May & Baker: Equity Analysts Upgrade Stock on COVID-19 Advantage