Impressive Second Quarter Masks Poor Q1 Performance: Neimeth International Pharmaceuticals Plc closed its books for the quarter with an impressive half-year financial scorecard, showing the highest revenue recorded in the corresponding period in the last six years. The firm’s top-line grew by 11.25% to NGN976mn (vs. NGN877mn in H1:2018).
Both business segments — Pharmaceuticals and Animal Health — contributed immensely to the record-record performance. The pharmaceutical business grew by 10% to NGN958mn while the Animal Health business grew significantly by 129.98% to NGN18mn (vs. NGN8mn in H1:2018).
It is noteworthy that the second quarter accounted for 76.73% of total revenue
generated so far in the company’s financial year which ends in September. Hence, Year on
Year revenue growth pegged at 55.05%. The improved revenue performance in Q2:2018
came with a slight increase in trade receivables (+5.40%), at NGN622mn.
Although the firm appears to be recording growth in revenue, a significant proportion of it is held in receivables. Considering that this performance was an outlier in the history of first-halves, and going by past trends, we are projecting a moderate growth of 1.42% in revenue to NGN2.30bn for 2019FY.
Costs-to-Sales Rises above Trend: Cost to sales settled at 53.82%, higher than a six-year average of 50% in corresponding periods. All the elements of direct cost increased
during the period, with the most significant being the cost of raw materials consumed,
which grew by 48.92%.
Overall, the firm recorded a 31.39% growth in cost, from NGN400mn in H1:2018 to NGN525mn. Going by past trends, the firm records slightly higher cost to sales position in the second half of the year. Also, the industry-wide issue regarding the importation
of Active Pharmaceutical Ingredients (APIs) is expected to influence the upward movement
in cost. On a balance of factors, we have made a projection of 49.14% for cost-to-sales.
NEIMETH Narrowly Escapes a Loss Position: In H1:2019, the firm recorded significant
dip in earnings, which dropped by 81.57% to NGN5.44mn, from NGN29.54mn in H1:2018,
despite the cost savings on operating expenses. The woeful performance was a result of the contraction in gross profit by 5.61% and an increase in net exchange loss to NGN9.85mn, from NGN0.27mn in H1:2018. Therefore, the firm recorded a loss amounting of NGN139bn In Q1:2019, after four consecutive quarters of profits. The loss position was an aggregation of several shortcomings such as low demand, heightened cost-to-sales, increased distribution and marketing costs amongst others.
However, in the second quarter, the firm made a profit of NGN145mn which was sufficient enough to offset the loss made in the previous quarter, although inadequate to deliver growth in earnings. Following our projections in top-line and cost-to-sales, we have made a forecast of 10.30% for net margin, from an earnings level of NGN237mn in 2019FY.
Recommendation: We revised our 2019 expected EPS downwards to NGN0.12, on the back of lower earnings growth projections. However, we maintain our target P/E at 5.0x considering the low earnings reported during the period. Our target price has therefore been reviewed downwards from NGN1.00 to NGN0.62.
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