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Stock & Analyst Updates | |
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Monday, March 18, 2019 01:04 PM / CardinalStone Research
In this report, we provide an update on Fidson
Healthcare Plc, following its ongoing capital raising exercise. We highlight
that the net proceeds of the rights issue will be used to finance working
capital needs, as well as deleverage the company’s balance sheet. We see this
singular exercise as one that will result in earnings accretion, as c.43% of
the company’s operating profit was used to service debt (based on 9M’18
numbers).
We believe scope to
grow volumes still abounds
Fidson’s ultra-modern plant which has been adjudged
one of the largest pharmaceutical manufacturing facilities in Africa has
continued to deliver immense value to the company. According to management, the
company has continued to ramp up on volumes, following the capacity expansion,
with an average utilization rate at 75% and 71% in the infusion and pharma
plants respectively over 9M’18 (vs. 70% in 2017). Also, the company’s
penetration into the low end of the market has continued to support top line
and is expected to contribute further over the years. A key product of the
company its intravenous fluids, which has gained significant traction since the
introduction in 2017, contributing 12.5% to revenue by 9M’18. Management
expects this to increase to 15% contribution in 2019, which we believe is
achievable given the local demand supply gap for intravenous fluids. Management
guided that it intends to focus on further product development over the medium
term and in 2019 alone, it plans to introduce about 20 SKUs of new products
across the ethical and over-the-counter segments. The company grew its volumes
both in the premium products and the lowend-market products, despite weak
consumer wallets in 9M’18. We take this as a positive and expect further
volumes growth over the medium to long-term. Overall, the company has grown its
revenue at a CAGR of 14.4% over the past five years to N14.1 billion in FY’17.
Capital raise to
address key pressure points
While we are sanguine on our volumes outlook, our major worries for the business are elevated input costs, as well as finance costs, which c.43% of operating profit was used to service the company’s debt over 9M’18. We believe it will be difficult to drive cost to sales ratio to historical levels of sub. 47%, given the significant devaluation of the Naira which has made imports more expensive. However, we opine that the pressure on direct input costs may be subdued if management proceeds with its plans to source key raw materials directly through strategic partnerships with foreign counterparts, as opposed to sourcing the products domestically from importers. That said, management has hinted that c.37% of the net proceeds (N1.1 billion) will be utilized to fund its working capital needs. As such, we see scope in cost-of-sales hovering at 51.0% in FY’19 (vs. 53.5% in 9M’18).
On finance costs, we highlighted in our note ‘’Riding
on the wave of increased capacity” that a debt restructuring plan should bode
well for the company, as high finance costs previously eroded potential
earnings growth. We believe that the company’s move to deleverage its balance
sheet is a step in the right direction, as we expect this singular exercise to
result in earnings accretion for the company. For context, FIDSON will utilize
N1.8 billion (c. 62.3% of net proceeds) to repay more expensive loans on its
balance sheet. Going by provided breakdown, as at November 2018, the company
had an outstanding debt balance amounting to N6.1 billion and the payment of
29.7% of its loan portfolio should bring effective debt-to-equity ratio to
36.8% in FY’19 (vs. 9M’18 72.9%)
Breakdown of
interest-bearing loans as at 30 November 2018
Total outstanding debt balance stood at N6.1 billion,
which included:
a) N496.3 million from bond issued at an interest rate
of 15.5%
b) N2.4 billion of intervention funding obtained from
the Bank of Industry and the Central Bank of Nigeria at interest rates between
7% and 12.5%
c) N428.4 million of finance leases obtained from
commercial banks at interest rates between 23% and 25%
d) N917.5 million of import finance facilities
obtained from commercial banks at interest rates between 21% and 26%
e) N578.2 million of overdraft facilities obtained
from commercial banks at interest rates between 21% and 26%
f) N1.3 billion of commercial papers at interest rates
between 19% and 23%
Our take – an offering
of value
Having highlighted the cardinal points of our investment case for FIDSON, we conclude that there is a substantial value proposition for investors, from a fundamental perspective. Our recommendation is largely hinged on the company’s ability to continue to grow its top line, given an ultra-modern facility, robust product offerings (over 250 drug products to its credit) and the demographic advantage the Nigerian market offers. We also note that the Federal Government has made locally manufactured products more attractive, given the 20% import duties on finished pharmaceutical products. On costs, post-rights, we expect the company to record significant savings in direct cost of sales, as well as finance costs. All in, we believe that the successful completion of the rights will result in earnings accretion for the company, thus returning value to its shareholders.
Related News
1.
FIDSON Rights Issue To Open March 06,
2019
2.
FIDSON Obtains SEC Approval To Issue A
Revised Rights Issue Circular
3.
FIDSON Declares N521.40m PAT in Q2 2018
Results,(SP:N6.15k)
4.
FIDSON Declares N202.80m PAT in Q1 2018
Result,(SP:N5.46k)
5.
FIDSON Declares N1.06bn PAT in 2017
Audited Results,(SP:N5.70k)
6.
Fidson Healthcare Plc Appoints Mr
Olusegun S Adebanji as Director
7.
FIDSON Declares N730.45 mln PAT in Q3
2017 Result,(SP:N3.36k)
8.
Fidson Healthcare Plc New plant is
Delivering Enormous Value
9.
FIDSON Declares N466.09 mln PAT in Q2
2017 Result,(SP:N2.94k)