Pharmaceutical revenue takes a hit

MAY & BAKER reported a decline in its top-line of 9.57% to NGN5.92 billion (vs. NGN6.54 billion in 9M:2018). The pharmaceutical unit (which contributes c.98% to total revenue) recorded a revenue of NGN5.86 billion in 9M:2019, 6.95% lower than in 9M:2018. The decline is attributed to the industry-wide reduction in prices of Over-The-Counter (OTC) products, in light of constrained purchasing power of consumers and intense competition. The beverage unit, however, recorded some level of resilience, inching upwards by 9.18%, to print at NGN57 million. In the absence of new products development (or commercialization of NIPRISAN), the decline in revenue is expected to linger in the near term. Against this backdrop, we have revised our 2019FY revenue projection downward to NGN8.17 billion, implying a revenue contraction of 4.52%. 

Surge in administrative expenses wipes out cost savings

Cost of sales declined by 9.69% to NGN3.75 billion pegging cost-to-sales at 63.45% (vs. 63.53% in 9M:2018). In the same vein, distribution and marketing expenses declined sharply by 22.69% to NGN757 million.

Contrary to the aforementioned, administrative expenses increased by 16.59%, wiping out the cost savings from direct costs and distribution expenses. The double whammy of a shrinking top-line and increasing operating expenses resulted in a fall in operating profit, which dropped by 5.78% YoY to NGN841mn (vs. NGN893 billion in 9M:2018). Nevertheless, operating margin improved slightly to 14.22% (vs. 13.65% in 9M:2018). By 2019FY, we expect cost to sales to settle even lower at 61.97%, given the downtrend so far in the year and historical trend.

May & Baker's margins improve despite revenue contraction

Margins improve across board

Following the completion of its rights issue, the firm paid off its long-term debts entirely while also reducing its current debts by 35.46%. Consequently, finance costs declined by 41.55% to NGN176 million (vs. NGN301mn in 9M: 2018). Overall, net margin improved to 8.01% from 6.34% in the corresponding period.

In the coming period (2019FY), we expect finance cost to temper further, thereby giving room for PBT and PAT to settle at healthy levels – 11.78% (vs. 10.58% in 9M:2018) and 8.02% (vs.5.02% in 9M:2018) respectively. Earnings quality also improved as cash-generating from operating activities came in higher than net profit, resulting in a net operating accrual of NGN67 million.

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Outlook and recommendation

Given the aforementioned, we are maintaining our target P/E of 6.40x and expected EPS of NGN0.34, implying a target price of NGN2.16 on the ticker. This implies an upside potential of 8.00% to its last traded price (NGN2.00). Therefore, we rate as HOLD.

Maybaker's margins improve despite revenue contraction

Deal book 300 x 250


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