Neimeth to Pay Dividend after 9-Year, But WSTC Says Share is Overpriced

Neimeth to Pay Dividend after 9-Year, But WSTC Says Share is Overpriced

Neimeth Pharmaceuticals International Plc is expected to pay its first dividend in 9 years but analysts at WSTC Securities Limited think that the market has priced in future growth into its stock price.

In other words, Neimeth Plc.’s share price trades at premium currently in a largely overbought stock market.

As a result, analysts advised a sell despite the fact that earnings prospect appears strong, forecasts actually project better earnings performance in 2021.

The company’s market capitalisation printed at ₦4.083 billion on 1.899 billion shares outstanding as market price per share closed ₦2.15 on Friday – above ₦1.59 estimated by WSTC Securities.

Equity analysts’ moods swung positive over Neimeth’s restructuring activities, which they think has started to support profitability.

WSTC Securities Limited while initiating buying recommendation on the company’s stock said restructuring activities of Neimeth continued to yield positive results.

Neimeth revenue grew by an impressive 20% year on year, expanding from ₦2.37 billion in financial year 2019 to ₦2.84 billion in 2020.

Operating profit, however, declined by 5%, resulting from an exchange loss incurred as Neimeth engaged importation of raw material.

In absolute term, Neimeth operating profit sloped downward from ₦413 million the company reported in 2019 to ₦393 million.

Meanwhile, despite a 12% year on year decline in finance costs, profit before tax also fell by 2% from ₦304 million to ₦297 million.

“The impact of the exchange loss weighed heavily on bottomline”, analysts at WSTC Securities said in an equity report.

While profit after tax plunged by 3% from ₦220 million in 2019 to ₦212 million in 2020, the Board of Directors declared ₦0.065k cash dividend for the year.

“We note that the dividend declaration was the first in the last nine years. The Company last declared a cash dividend in 2011”, WSTC Securities said.

Analysts said Neimeth strong revenue performance was actually driven by its Animal Health Division as the company further consolidated its strategies to create value.

“We note the business’s prior operating challenges in generating revenue without having to push credit sales significantly.

“The implication of the credit policy resulted in persistent impairment losses on receivables.

“In 2015, the management changed the policy on sales and adopted a cash-backed revenue generation approach”.

It was however noted that double-digit revenue growth recorded in 2020 reflected the revitalisation of the Company’s Salesforce.

Neimeth Plc operates two divisions – Pharmaceuticals and Animal Health division.

The Pharmaceuticals division, which contributed 87% to total revenue, recorded an 8% year on year growth in 2020.

But growth recorded in the Animal Health division hit the rooftop at 310% year on year.

WSTC Securities stated that effectively, the Animal Health division drove 60% of the increase in total revenue in 2020.

It was noted that the Pharmaceuticals division grew on the back of improved market penetration and increased demand, particularly as COVID-19 rampage the financial year 2020.

In line with the double-digit revenue growth, operating expenses rose by 27%, attributed to increased market activation-related expenses.

Notably, marketing expenses grew by 34% while selling and administrative expenses grew by 23% year on year.

Analysts explained that Neimeth incurred an exchange loss during the year, which dampened the gains achieved on the topline.

Recalled that during the year, the Central Bank of Nigeria (CBN) adjusted the exchange rate upwards on two different occasions.

First, due to the nation’s need to protect the local currency, CBN adjusted the official exchange rate from ₦306/$1 in March 2020.

Also, in August 2020, the apex bank further adjusted the exchange rate from ₦360/$1 to ₦380/$1.

In the importers and exporters (I & E) FX window, the exchange rate advanced from ₦360/$1 in March 2020 to about ₦410/$1 at the end of 2020.

In the parallel market, however, the exchange rate was significantly higher as it traded at ₦470/$1.

WSTC explained that the upward movement in the exchange rate during the year resulted in a ₦189 million exchange loss for Neimeth Plc, given its exposure to foreign currency.

The Pharmaceuticals Company incurred a material foreign-denominated cost, in the form of raw materials imports.

Analysts said consequent to the FX loss incurred, operating profit dipped by 5% from ₦413mn in FY’2019 to ₦393mn in 2020.

“We discovered that operating profit could have grown by 41% when we discounted the FX loss incurred”, WSTC Securities stated.

Major Developments

In 2020, the Group obtained ₦3.31 billion loan during the financial year, representing a combination of loans from the CBN and Bank of Industry (BoI).

The increased debt raised the Company’s financial leverage significantly to 5.05x from 2.57x a year earlier.

With increased financing, Neimeth Plc invested in fixed assets as Plant, Property and Equipment grew by 60% from ₦758 million in 2019 to ₦1.21 billion in 2020.

It would be recalled that in recent time, Neimeth announced that the Board agreed to a ₦5 billion equity capital raise.

However, the Board will present the resolution for shareholders’ approval at the scheduled Annual General Meeting on March 9, 2021.

“In our view, we posit that the capital raising efforts (debt and equity) of the Company signals that it is making active investments to tap growth opportunities, particularly in the Animal Health business segment”, WSTC posited.

Neimeth’s financials indicates that the company’s cash position surged by 2,068% from ₦122 million in 2019 to ₦2.64 billion in 2020.

Analysts said this was mainly attributed to increased debt financing during the period as the company builds on new growth agenda.

For the year, its operating cash flow declined by 40% from ₦311 million in 2019 to ₦186 million in 2020 arising from a 168% increase in the working capital deficit.

WSTC Securities said it has raised growth expectations on Neimeth, and analysts said they are expecting the Company’s topline growth to sustain in 2021.

“We forecast an 18% revenue growth in 2021, expected to be driven by double-digit growth in both the Pharmaceuticals and Animal Health divisions”, the firm stated.

In addition, analyst are expecting to see continued market penetration efforts by the Pharmaceuticals Company.

The investment firm projects a 40% operating profit growth in 2021, mainly due to non-expectation of a significant FX loss in 2021.

Overall, WSTC Securities estimated a 37% profit growth from ₦212 million in 2020 to ₦291 million in 2021.

Analysts also forecast ₦0.09 dividend payment for 2021 arising from improved earnings outlook in the year.

Valuation

WSTC Securities estimated a ₦1.59 fair value company’s share. However, it noted that at ₦1.98 market price, the stock trades at a 20% premium to its fair value.

Meanwhile, the firm said its ₦0.09 dividend projection implies a 4% dividend yield, altogether, based on estimates, the stock offers a -15% total return.

“The implication of this is that we believe that the growth prospects of the stock has been priced in.

“We recommend a SELL and expect to see a price reversal in the near to medium term”, WSTC Securities stated.

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Neimeth to Pay Dividend after 9-Year, WSTC Says Share is Overpriced