Maintain Sell Rating on Neimeth Stock

Neimeth: Analysts maintain buy rating on earnings upbeat, fundamentals

Neimeth International Pharmaceutical Plc operational relevance is quite important at this time with coronavirus on the street.

Though, in the second quarter, the company’s numbers came weaker than expected due to increased cost of operations.

Traded at ₦0.72k, Neimeth’s market capitalisation settled at ₦1.367 billion on 1,899,157,108 shares outstanding.

In first-half financial results, the company recorded revenue growth of 19.38% to ₦1.17 billion from ₦975.98 million in the comparable period in 2019.

Revenue from both business lines edged higher, especially the animal health segment, which surged by 897.42% to ₦182.94 million from ₦18.34 million.

The firm also posted revenue of ₦982.23 million in the pharmaceutical division, which typically contributes about 90% to the overall top-line.

Nonetheless, Neimeth lost its growth momentum in the second quarter as revenue slumped by 42.28% from ₦730.57 million in Q2:2019 to ₦421.68 million.

This is largely attributed to the sales volume decline during the period, as competition within the Over-the-Counter (OTC) space intensified.

Analysts at Meristem Securities Limited stated the firm is quite upbeat about the firm’s performance in the coming quarters.

According to the firm, it stated that not only does the firm have a history of registering better performances in the second half of the year.

The essentiality of the firm’s products puts Neimeth on the right platform to churn out volumes amidst the outbreak of the COVID-19 pandemic.

“Against this backdrop, we project a 2020 revenue of ₦2.83 billion, implying a growth rate of 19.17% from ₦2.37 billion in 2019”, Meristem stated.

Rise in Costs Moderate Margins

Analysts recognised that rising cost impacted the company’s performance as profit margin moderated.

Analysts stated that in line with revenue growth, direct costs advanced by 16.50% to ₦611.90 million during the first half of 2020.

This was particularly influenced by a 15.94% increase in the salaries and wages of production workers.

Nonetheless, the robust growth in revenue provided succor to cost to sales, resulting in a slight moderation to 52.52%, down from 53.82% in the first half of 2019.

Neimeth recorded a surge in operating expenses to ₦427.25 million, owing to the disconcerting 44.96% spike in marketing and distribution expenses.

Operating profit, however, remained strong, settling at ₦140.26 million, which was an uptick from ₦49.66 million in Q1:2019, thereby pegging operating margin at 12.04%.

Meanwhile, operating margin had pitched at 5.09% in the first half of 2019.

Ultimately, bottom-line edged higher to ₦56.60 million compare to ₦5.44 million in the first half of 2019.

This implied a net margin of 4.86%, up from 0.56% in the comparable period in 2019.

Analysts at Meristem Securities acknowledged the improvement in earnings quality during the cumulative half-year period.

“The firm registered a negative net operating accrual of ₦5.64 million as net cash flow from operating activities exceeded net income by 9.97%.

“The narrative is, however, significantly different when evaluating the Q2 standalone figures as the firm’s performance went down the pits”, Meristem stated.

The cost pattern weakened the company’s performance. In the period, cost-to-sales advanced by 8.19% in the second quarter of 2020 to 55.15%- the highest in five quarters.

Then, operating expenses also trod a similar path, settled at ₦227.40 million, a 3.29% uptick from ₦220.16 million in the second quarter of 2019.

The combination of a rise in costs and a decline in revenue consequently depressed margins.

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Gross and operating margins pegged at 44.85% compare to 53.04% in Q2:2019 and 5.12% as against 22.56% in the comparable period respectively.

As an offshoot of the import facility of ₦488 million and Bank of Industry loans worth ₦750 million taken during the period, finance cost spiked by 124.35% to ₦54.64 million.

This happened to be the highest recorded in a single quarter. Overall, bottom-line sank to a loss of ₦26.06 million at the end of the second quarter.

“While we do not anticipate significant moderation in costs in the coming quarters, our 19.17% revenue growth forecast is expected to hold the firm’s performances in place to deliver earnings of ₦355.62 million and a net margin of 12.58% in 2020”, analysts stated.

Outlook and Recommendation

Due to factors such as the essential nature of the firm’s products, access to concessionary loans offered by the central bank.

As well as possible partnerships with the Governments for the production of essential medicines, analysts expects an improvement in the company’s performance in the coming periods.

As a result, Meristem maintained 2020 target price of ₦0.76 on the back of a price to earnings ratio of 3.60x and an expected EPS of ₦0.21.

Neimeth: Analysts maintain buy rating on earnings upbeat, fundamentals

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