Fidson Healthcare Plc New plant is Delivering Enormous Value


Thursday, July 27, 2017 4:33PM / CardinalStone Research

In this report, we provide an update on Fidson Healthcare Plc following the opening of its  World Health Organisation (WHO) certified manufacturing plant last year and the organic expansion into a new product category both of which are set to deliver sustainable earnings growth for the company.

Based on this development, we have revised our FY2017-2020 estimates higher and increased our target price on the company to N6.54 (Previous: N2.15). Our new price target implies a 92.9% upside potential from current market price hence, we upgrade our recommendation on the company to a BUY. See key highlights below;

New manufacturing facility - increased scope for revenue growth

After a two year delay, Fidson Healthcare (Fidson) announced the completion and commencement of operations in its new World Health Organisation (WHO) compliant ultra-modern manufacturing facility located in Sango Ota, Ogun State. The plant is the biggest manufacturing facility in West Africa and one of the five shortlisted for WHO certification in Nigeria.

It is equipped with six production lines for the production of Tablets, Capsules, Liquids, Cream & Ointments, Dry Powder and Intravenous infusions - a new product line. The new plant doubled former production capacity thereby giving Fidson the capability to grow sales volume as the company ramps up production to meet growing demand for drugs in Nigeria and the greater West African region.

According to management, the company witnessed a strong influx of demand for its products particularly intravenous fluids given local demand-supply gap.

We project 174.3% growth in EPS by FY'17

Given the relatively improved economy, rising demand for consumer healthcare products as well as favourable policies in favour of local drug manufacturers (such as the 20% duty on imported finished medicines versus zero percent previously), we forecast FY'17 revenue and EPS at N12.9 billion and N0.52 respectively.

This translates to a 69.5% YoY growth in revenue and 174.3% YoY growth in earnings in FY'17. Our earnings outlook is based on 1. Expected increase in sales volume from expanded capacity; 2. Improved FX liquidity following the aggressive supply of FX from the Central Bank of Nigeria (CBN); and 3. Expected operational cost savings to support earnings.

Valuation - we upgrade our recommendation on the company to a BUY

Based on the revision of our estimates, and using a DCF valuation approach covering a four-year period 2017-2020, we raise our target price on Fidson to N6.54 (previous: N2.15).

Our target price implies a 92.9% upside to current market price hence we upgrade our recommendation on the stock to a BUY from our previous HOLD rating. Key risks to our valuation include 1. Higher than envisaged competition in the pharmaceutical sector particularly for intravenous fluids which will negatively impact on sales volume growth; 2. Delay in the expansion of production capacity as production lines reach full capacity; and 3. A weakening in the Naira which will impact negatively on production costs.

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