Neimeth Pharmaceutical Earnings Jump as Virus Boosts Demand for Drugs
· Analysts at Meristem Upgrade Price Target, Reiterate Buy
Equity analysts at Meristem Securities upgraded Neimeth Pharmaceutical Plc price target to ₦1.45 as the outbreak of coronavirus boosts demand for drugs.
Despite the upgrade, analysts still maintain a negative position on the stock as they see it having 3.33% downside based on market price of ₦1.50.
Neimeth share price traded at ₦1.50 compare to price target estimate of ₦1.45, means that the stock has 1.33% downside.
Looking at the 9 months of financial year 2020 unaudited results, analysts sense mix performance around key metrics.
Though, the pharmaceutical company’s scorecard feature tremendous growth in top and bottom line as demand for drugs spike.
Meristem stated that standalone revenue for the April-June financial period grew by 93.49%.
This resulted in a cumulative growth of 42.21% to ₦2.01 billion for the nine-month period from ₦1.41 billion in the comparable period.
The impressive performance was founded on a collective growth in both business segments.
Revenue from the animal health segment surged by 1,629.41% to ₦317 million from ₦18 million in 9-month results for financial year 2019.
In the same manner, the revenue from the pharmaceutical segment edged higher by 76.35% to ₦1.69 billion from ₦957 million in 9M:2019.
Analysts at Meristem Securities explained that in line with expectations, the COVID-19 pandemic boosted demand for drugs across several therapeutic categories.
This stimulated volumes and eventually, topline for drug manufacturers.
Given the expectation of sustained growth in demand for drugs and related products, we maintain our positive outlook for the firm’s revenue.
“We forecast a full-year revenue of ₦3.01 billion, implying a growth rate of 27.14%”, Meristem’s analysts stated.
Moderation in Cost-to-Sales Prop Performance:
Neimeth’s direct costs increased at a slower rate, up +18.84% relative to revenue, resulting in a moderation in the cost to sales ratio to 45.29% from 54.20% in 9M:2019.
Analysts said hence, gross profit edged higher to 54.17% from 45.80% in the corresponding period last year.
Meanwhile, operating expenses surged by 29.24%, driven majorly by 73.91% uptick in advertisement and promotion fees plus product registration expenses.
On this account, Meristem stated that NEIMETH’s operating expenses margin moderated slightly to 33.59% from 36.97%.
In addition to the rise in operating expenses, a foreign exchange loss of ₦34.73million was recorded during the nine-month period, dwarfing the extra income of ₦17.54million realized from its leased property.
During the period, analysts at Meristem explained that finance cost surged by 96.26% on the back of a rise in its interest on debenture.
“Given the recent devaluation of the currency, the firm’s exposure to foreign loans, puts it in a disadvantaged position both in servicing and the eventual repayment of the principal”, analysts said.
Nevertheless, the growth in top-line provided support to earnings before interest and tax (EBIT), ultimately resulting in an improvement in interest cover ratio to 2.41x from 1.36x in
9M:2019.
Meristem said for the rest of the year, the heightened likelihood of a further naira devaluation would trigger an uptick in finance and importation costs.
The investment firm however stated that revenue growth forecast is expected to provide a buffer, keeping cost-to-sales ratio at current levels in 2020FY.
CBN Intervention Expands Debt Position:
In the period, Neimeth’s earnings expanded by 606.38% in the third quarter and 664% in the cumulative nine-month period on the back of growth in top-line.
Accordingly, the negative position of retained earnings moderated even as the firm’s profitability ratios improved.
Read Also: Neimeth: Analysts maintain buy rating on earnings upbeat, fundamentals
Neimeth return on equity (ROE) increased to 20.94% from 2.90% in 9M:2019 while return on asset (ROA) rose to 5.32% from 1.23% in the comparable period.
Meristem acknowledged the surge in total assets by 124.43% riding off the back of a spike across major line items.
Particularly, property, plant and machineries which expanded +55.65%, receivables grew+47.09% and Cash bolstered+2,020.47%.
In spite of the revenue growth recorded during the period, asset turnover contracted to 0.47x from ₦0.60x in 9M:2019.
The firm’s working capital position, however, expanded to ₦3.52billion from ₦560.84 million in 2019.
Analysts explained that interest bearing loans expanded by 226.66% to ₦4.72 billion on the back of the Central Bank of Nigeria’s ₦2.4billion Intervention fund.
Consequently, the firm’s equity multiplier expanded to 4.75x from 2.57x indicating an increase in the value of debt employed in financing the firm’s assets.
Meristem said premised on the above, its target price has been reviewed upwards to ₦1.45 on the back of an expected earnings per share of ₦0.29 and a target P/E of 5.0x.
“This represents a downside of 3.33% based on its closing price of ₦1.50 in the last trading session on the local bourse in July. We rate the ticker “BUY”, Meristem stated.
Neimeth Pharmaceutical Earnings Jump as Virus Boosts Demand for Drugs
