Neimeth Pharmaceuticals – Macroeconomic Challenges Weigh on Profitability

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The Restructuring activities of Neimeth Pharmaceuticals International Plc (Neimeth) continued to yield positive results, as reflected in the Company’s FY’2020 performance.

Revenue grew by an impressive 20% year-on-year (YoY), from N2.37bn in FY’2019 to N2.84bn in FY’2020. Operating profit, however, declined by 5% YoY, resulting from an exchange loss incurred. Operating profit lowered from N413mn in FY’2019 to N393mn in FY’2020.

Despite a 12% YoY decline in finance costs, profit before tax declined by 2% YoY from N304mn in FY’2019 to N297mn in FY’2020. The impact of the exchange loss weighed heavily on the bottom line. Profit after tax declined by 3% YoY from N220mn in FY’2019 to N212mn in FY’2020.

Neimeth Pharmaceuticals - Macroeconomic Challenges Weigh on Profitability

The Company declared a N0.065k (6.5 kobo) cash dividend for FY’2020. We note that the dividend declaration was the first in the last nine years. The Company last declared a cash dividend in 2011. The closure date for dividend payment is February 23 — 28, 2021, with the qualification date on February 22, 2021.

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The payment date is on March 12, 2021. 0n March 9, 2021, the Company will hold its Annual General Meeting (AGM) at NECA House, Plot A2, Hakeem Balogun Street, Central Business District, Alausa, Ikeja, Lagos.

Strong Revenue Performance Driven by the Animal Health Division

The Company further consolidated its strategies to create value during the financial year. We note the business’s prior operating challenges in generating revenue without having to push credit sales significantly.

The implication of the credit policy resulted in persistent impairment losses on receivables. In 2015, the management changed the policy on sales and adopted a cash-backed revenue generation approach.

In line with the double-digit revenue growth, operating expenses rose by 27% YoY, attributed to increased market activation-related expenses. Notably, marketing expenses grew by 34% YoY while selling and administrative expenses grew by 23% YoY.

Neimeth Revenue Trend

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Neimeth Pharmaceuticals Macroeconomic Challenges Weigh on Profitability Brandspurng

The Company incurred an exchange loss during the year, which dampened the gains achieved on the topline. During the financial year, the Central Bank of Nigeria (CBN) adjusted the exchange rate upwards on two different occasions. The CBN adjusted the official exchange rate from N306/$1 in March 2020.

The CBN further adjusted the exchange rate in August 2020 from N360/$1 to N380/$1. In the importers and exporters (I & E) FX window, the exchange rate advanced from N360/$1 in March 2020 to c.N410/$1 at the end of 2020.

In the parallel market, however, the exchange rate was significantly higher (N470/$1). The upward movement in the exchange rate during the year resulted in a N189mn exchange loss for the Company, given its exposure to foreign currency. The Company incurs a material foreign-denominated cost, in the form of raw materials imports.

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Consequent to the FX loss incurred, operating profit dipped by 5% YoY from N413mn in FY’2019 to N393mn in FY’2020. We discovered that operating profit could have grown by 41% YoY when we discounted the FX loss incurred. The FX loss impact extended to the Company’s bottom line, as profit after tax declined by 2% YoY from N220mn in FY’2019 to N212mn in FY’2020.

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Major Developments

The Group obtained a N3.31bn loan during the financial year, representing a combination of loans from the CBN and Bank of Industry (Bol).

The increased debt raised the Company’s financial leverage significantly to 5.05x (FY’2019: 2.57x). With increased financing, the Company invested in fixed assets. Plant, Property and Equipment grew by 60% YoY from N758mn as of FY’2019 to N1.21bn in FY’2020.

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Recently, the Company announced that the Board agreed to a N5bn equity capital raise. However, the Board will present the resolution for shareholders’ approval at the scheduled AGM on March 9, 2021.

In our view, we posit that the capital raising efforts (debt and equity) of the Company signals that it is making active investments to tap growth opportunities, particularly in the Animal Health business segment.

The Company’s cash position surged by 2,068% from N122mn in FY’2019 to N2.64bn in FY’2020, mainly attributed to increased debt financing during the period. Operating cash flow declined by 40% YoY from N311mn in FY’2019 to N186mn in FY’2020, arising from a 168% increase in the working capital deficit.

Financial Performance Summary

Neimeth Pharmaceuticals Macroeconomic Challenges Weigh on Profitability Brandspurng1

Outlook

We raise our growth expectations on Neimeth, and we expect the Company’s topline growth to sustain in FY’2021. We forecast an 18% revenue growth in FY’2021, expected to be driven by double-digit growth in both the Pharmaceuticals and Animal Health divisions. We expect to see continued market penetration efforts by the Company.

We project a 40% operating profit growth in FY’2021, mainly due to our non-expectation of a significant FX loss in FY’2021. Overall, we estimate a 37% profit growth from N212mn in FY’2020 to N291mn in FY’2021. We also forecast an N0.09 dividend payment for FY’2021.

Valuation

In arriving at our fair value, we used a blend of Discounted Cash Flow (DCF), Dividend Discount Model (DDM), Residual Income Model (RIM), and Enterprise Value/EBITDA (EV/EBITDA) valuation methodologies. We discounted our projected cash flows using a 17% cost of equity estimate.

Overall, we arrived at a N1.59 fair value. At N1.98 current market price, the stock trades at a 20% premium to our fair value (i.e., price return: -20%). Meanwhile, our N0.09 dividend projection implies a 4% dividend yield. Altogether, based on our estimates, the stock offers a -15% total return.

The implication of this is that we believe that the growth prospects of the stock has been priced in. We recommend a SELL and expect to see a price reversal in the near to medium term.

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