Neimeth Plc: Analysts Advised Investors to Sell despite Enhanced Profitability
WSTC Securities Limited has advised investors to offload Neimeth Pharmaceutical Plc stock, though the firm recognised the company’s enhanced profitability.
Despite the sell recommendation, analysts stated that they remain optimistic of the growth prospects of the company.
The investment firm said it arrived at a fair value of N1.26 which implies a justified price earnings of 6.17x, though the stock currently trades at a price earnings ratio of 9.04x.
In the recently released Q3’20 ended June 30, 2020 results, Neimeth declared a strong topline and bottomline growth.
The company’s revenue significantly expanded by 93% year-on-year, from N434.59 million in Q3’19 to N840.87 million in Q3’20.
Following the growth in the topline, Neimeth’s operating profit rose by 177% from N103.93 million in Q3’19 to N288.32 million in Q3’20.
Meanwhile profit before tax grew by 269% from N50.63 million in Q3’19 to N187.03 million in Q3’20.
“We attribute the significant earnings growth to a possible effective implementation of the Company’s strategies towards value creation”, WSTC’s analysts stated.
Analysts explained that Neimeth Plc.’s management earlier guided on the business objective of a gradual expansion of its operations.
It was noted that the Company articulated strategies to re-enter the Animal Health business and planned to regain a controlling market share in few years.
“In our view, the strategies being put in place appears to be effective, as reflective in the material increase in revenue from the Animal Health business segment”, analysts said.
In the result, revenue from the Animal Health business segment rose from N18.34 million in 9M’19 to N317.19mn in 9M’20, thus increasing its contribution to total revenue from 2% in 9M’19 to 16% in 9M’20.
WSTC said: “We also believe that the efforts of the Company to aggressively raise the market share of its flagship disinfectant – NCP yielded results during the period”.
In a separate development, the enhanced operating efficiency further strengthened bottomline growth.
Analysis of the result revealed that cost of sales margin stood at 45% in 9M’19 relative to 54% in 9M’20.
Expressing opinion, WSTC said the improvement in cost margin stemmed from increased productivity.
Analysts recalled that Neimeth earlier announced its plan to grow production output by upgrading existing facility and improving production planning and inventory control.
“We believe that the strategies resulted in the cost efficiency recorded in 9M’20”, WSTC Securities stated.
Reflecting management efficiency, WSTC reckoned that operating expenses were managed effectively in 9M’20, as reflected in the lower operating expense of 34% relative to 37% in 9M’19.
However, the lower operating expense margin was attributed to 82% reduction in impairment allowance from N50.00 million in 9M’19 to N9.00 million in 9M’20.
Consequent to the enhanced efficiencies recorded on its various cost items, operating profit grew by 247% from N117.06 million in 9M’19 to N406.38 million in 9M’20.
Despite the feat achieved in operational sides, Neimeth finance cost spiked by 96% from N85.99 million in 9M’19 to N168.75 million in 9M’20.
Analysts recalled that in Q3’19, Neimeth Plc. obtained a debt financing from the Central Bank of Nigeria.
So, total borrowings increased year-to-date (YTD) by 325% from N1 billion as of FY’19 to N4.25 billion as of 9M’20.
On a year on year basis, total borrowings grew by 206% from an average of N857.26 million as of 9M’19 to an average of N2.63 billion as of 9M’20.
Analysts said nonetheless the material increase in finance cost, profit before tax grew by 665% from N31.07 million in 9M’19 to N237.63 million in 9M’20.
Outlook and Valuation
“We revise our projections upwards to reflect increased prospects for growth. We see further improvements in its pharmaceutical business segment.
“We also see room for increased market share in the Animal Health business”, WSTC stated.
In Q3’20, the Company obtained a CBN long-term financing of N3.15bn. The higher debt taking significantly increased the financial leverage of the Company from 2.57x as of FY’19 to 4.76x as of 9M’20.
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“In our view, we think that the debt financing will be value accretive to the Company, as it focuses on capacity expansion and other investments”, analysts stated.
WSTC said: “while we note that an increased leverage has the potential to drive a higher return on equity, we also note the increased financial risk that comes with higher debt levels”.
On the back of the coronavirus pandemic that crippled many economies of the world, analysts said they expect to see increased attention and favourable government policies towards the health sector, and by extension, drive an overall increased growth in the health industry.
WSTC stated that financial year 2020 earnings per share (EPS) estimate was reviewed and adjusted upwards to N0.20 from N0.13.
“We also adjusted our cost of equity estimate from 23% to 18%”, the firm added
The downward revision resulted from a lower risk-free rate from 11% to 9%. Meanwhile, due to improve stock liquidity, WSTC also lowered extra risk premium from 6% to 3%.
“Owing to the 31% premium the stock trades to our fair value estimate, we maintain our SELL recommendation.
“While we remain optimistic of the growth prospects of the Company, we also think that the expected value of the Company has been priced-in already”, WSTC explained.
Neimeth Plc: Analysts Advised Investors to Sell despite Enhanced Profitability
