MAYBAKER: Alternative medicines, OTC trading hit demand as cost saving lifts profit

An increasing adoption of alternative medicines by Nigerians, reduced consumers spending as well as rising trend of over-the-counters trading is affecting demand for pharmaceutical products, and May & Baker is not left out in the scenario.

In its recent first half of financial year 2019 performance scorecard, demand for pharmaceutical products decline, but the company achieve feat on the back of its cost savings drive.

At N3.45 billion market capitalisation, May & Baker Plc, a pharmaceutical company has been fluctuating between N2.00 and N2.09 last week before it settled at N2 per share on Friday.

However, its year to date performance in the stock market has also been affected by the persistent bearish moves that have reduced investors’ fortune by trillion of Naira since the beginning of the financial year 2019.

Its year to date loss closed the week at 18.37%, while the mean consensus is HOLD, a delicate midpoint between BUY and SELL rating.

At the beginning of the year, its share price opened at N2.45, hit N2.60 high and the year low was N1.90 in between the demand and supply level.

In its first half 2019, May and Baker declared N290 million as profit after tax. Meanwhile, there was a 12.01% slump in revenue from N4.61 billion to N4.06 billion.

Meristem Securities acknowledged 17.02% growth recorded quarter on quarter to N2.19 billion, but noted that the firm’s cumulative performance in H1:2019 was below analysts’ projections of N4.59 billion.

At the top line, the company’s revenue from the pharmaceutical unit, which contributes the lion share to total revenue, dipped by 10.68% to N3.91 billion.

Fundamentals has not been really nice in the year, and competition has been tricky.

From the industry analysis, there was barrage of issues, however uncontrollable such that May & Baker has to contend with apart from competition with other brands.

According to Meristem, there was an intense competition in the Over-the-Counter (OTC) market, counterfeiting, increased adoption of alternative medicines and reduced consumer spending, all contributed to the decline in top-line”.

It however noted that the beverage unit showed some resilience, improving slightly by 2.79% to N10.04 million.

“While we acknowledge that the industry and economic headwinds still exist, past trends indicate that the firm performs better in the second half”, analysts at Meristem noted.

Analysts at Meristem Securities projected a slightly higher top-line amounting to N9.03 billion.

It stated that given that the firm has achieved 44.90% of N4.06 billion of its projection, the firm expects improved sales volume to fuel revenue growth for the rest of the period.

Though, the management was unable to influence demand for the pharmaceutical products line, it was observed that they were able to tame cost.

The cost saving advantage support the bottom line.

This was derived on the back 11.61% moderation in cost of sales to N2.73 billion from N3.09 billion in H1:2018. This came despite the fact that average inflation rate stayed around 12%.

Thus, cost-to-sales remained flat at 67.41% as against 67.11% in the first half of financial year 2018.

Then, operating expenses went downwards by 6.83% to N876 million. Following the completion of its Rights Issue, the pharmaceutical company paid down about 90% of its long-term debt from N353 million to N17.50 million.

May & Baker cost management drive force funding cost down, as finance cost tempered significantly by 47.49% to N109 million from N209 million in the first half of 2018.

Analysts noted that given the cost savings recorded during the period, operating margin remained flat at 12.45% as against 12.74% in first half of financial year 2018.

Down the line, operating profit tapered by 14.06% to N505 million from N587 million in the first half of 2018.

“In light of all these, we maintain our 2019 financial year cost-to-sales projection of 63.87% and 8.76% growth in operating expenses”, Meristem Securities stated.

The firm’s bottom-line grew modestly by 9.97% from N264 million in the first half of 2018 to N291 million, this representing 51.66% of Meristem analysts’ projection.

Analysts reckoned that the remarkable earnings performance was a combination of several factors such as slow growth in direct cost and operating expenses, and improved operating income.

Quarter on quarter, the firm recorded a similar growth by 17.70% to N157 million in the second quarter of 2019 from N134 million in the first quarter.

Earnings quality also improved as cash generated from operating activities exceeded net income, resulting in a negative net operating accrual of N21.065 million.

Meristem said: “with improved top-line, and increased efforts on keeping costs at bay, earnings in 2019 financial year should be in line with our projections of N562 million, implying a growth rate of 31.12% and net margin of 6.23% as against 5.02% in 2018”.

On a balance of factors, Meristem said it is maintaining target price of N2.16 on the ticker. This implies an upside potential of 8.00% to its last traded price of N2.00.

Speaking about the performance outlook in the pharmaceutical products, Consultants at LSintelligence stated at a forum that adoption of alternative medicine has come to stay.

“The best way to survive the trend is collaboration, investment in research and development along the value chain followed by diversification”, LSintelligence stated.

In the past, M&B aggressive expansion and diversification programme culminated in the creation of new businesses and subsidiaries.

For example, in 2005, Biovaccines, a local vaccine production subsidiary was set up in partnership with the Federal Government of Nigeria

May & Baker, Nigeria Plc was founded on September 4, 1944 as Nigeria’s first pharmaceutical company. It has its origin in England, the United Kingdom.

In Nigeria the company started as May & Baker (West Africa) Limited in 1944, a trading outpost to serve the West Coast of Africa.

In 2006, the company constructed a multi-billion naira food processing factory, constructed a local plant for the production of anti-retroviral drugs in Nigeria while the construction of a World Health Organization Standard Pharmaceutical production facility was constructed and commissioned on June 27, 2011

MAYBAKER: Alternative medicines, OTC trading hit demand as cost saving lifts profit

VIAJulius Alagbe
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