Investment recommendation – Good increase in M&B Plc PAT signals better value for shareholders

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May & Baker Nigeria Plc (M&B) printed strong operating performance in H1 2020 as its Profit After Tax (PAT) swelled by 50.91% to N0.44 billion chiefly on the lower cost of sales. Also, revenue rose marginally by 0.41% to N4.07 billion in H1 2020, thereby increasing the profit margin to 10.81% from 7.14% recorded in H1 2019.

May & Baker Nigeria Plc

M&B Plc’s segment revenue from pharmaceuticals (constituting 99.16% of the total revenue) increased by 0.58% to N4.04 billion; however, segment revenue from beverage (constituting 0.84%) moderated by 15.89% to N34.21 million in H1 2020.

Notably, M&B Nig Plc partnership with FG to produce vaccines via Biovaccinnes Nigeria Limited is expected to further contribute to the company’s growing revenue – the company entered into a 10-year agreement, ready for signature, with the FG to supply 15% of the national requirement of five vaccines: BCG, Hepatitis, Measles, TB and Yellow Fever.

Increase in revenue is also expected from M&B’s manufacturing facility – which is World Health Organisation (WHO)-certified – currently used by a French pharmaceutical giant, Sanofi Nigeria Limited to manufacture about five of its products.

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M&B Plc also reactivated its hand sanitizer production line in the course of the year to locally mass-produce “Smartans” – it’s brand of hand sanitizer. Given the positive developments and the attendant impact on revenue, as well as the reduction in M&B Plc’s costs, we expect the company’s margin to increase in FY 2020.

Hence, the possibility of M&B Plc increasing its dividend payout in FY 2020, from the N0.25k paid in FY 2019. MAYBAKER’s performance amongst other players was well above the industry average (of equally listed companies) based on financial ratio analysis, hence our ‘A’ rating

Balance Sheet Appears Strong as Debt to Cash Settles Below 1x

M&B Plc cash position improved to N1.54 billion in H1 2020 from N0.44 billion in H1 2019, given the additional N1 billion loan which it got at a relatively low rate of 7% – most of the borrowings were from CBN intervention fund. In addition to the lower cost of sales, we expect finance costs to remain low in FY 2020 even as Debt to EBITDA eased to 1.44x in H1 2020 from 2.38x in H1 2019.

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Finance costs moderated y-o-y by 62.39% to N41.34 million in H1 2020 from N109.93 million in H1 2019 – reflective of the significant reduction in bank overdraft (it dropped to N552 thousand from N399 million) which was obtained at a rate of 18% to 21%. In the same period under review, borrowings fell to N1.39 billion from N1.73 billion; albeit, we saw borrowings spike year to date amid additional N1 billion inflow.

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Hence, for a real sector company trading below its equity per share of N3.41, and with the expectation of increased profitability at FY 2020, resulting from an increase in revenue as well as lower cost of sales and finance costs, we recommend a “BUY” position.

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Any Threat of Foreign Currency Risk?

May & Baker Nigeria Plc’s exposure to foreign currency risk is limited to purchase of raw materials and some specialized items; however, the company minimised this risk by restricting imports to a circumstance where no local alternative exists. More so, its total borrowings were denominated in local currency.

MAYBAKER’s foreign exchange loss stood at N26.38 million as at H1 2020 when the major devaluation of the local currency against the greenback happened – Naira was devalued year to date by 6.27% to N381/USD at the official window.

Going forward, we expect Naira/USD to stabilise given the numerous intervention by CBN in recent times, especially the resumption of fx sales to the BDC segment.

CBN Intervention Fund, Suspended Import Duties to Boost

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Liquidity, Increase Revenue & Ease Costs Pressure Amid COVID-19 pandemic challenge, CBN floated N100 billion intervention fund in the health sector for the players to expand
capacity in order to cushion the negative effects of the virus on the local economy.

Also, Federal Government suspended import duties on medical equipment, medicines and personal protective gears required for treatment and management of COVID-19 for,
at first, three months, effective from March 1, 2020.

This was further extended by the Minister of Finance to September 30, 2020. We expect the above-mentioned policy pronouncements to further strengthen MAYBAKER’s liquidity level, boost revenue and ease pressure on costs.


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