Neimeth International Pharmaceuticals Plc

NEIMETH INTERNATIONAL PHARMACEUTICALS PLC

Ticker:                            NEIMETHNature of Business:    PharmaceuticalsLocation :                              Nigeria
Recent Price:           NGN1.75     52-Week High/Low: NGN2.30/1.50Estimated Fair Value:      NGN1.40-NGN2.10
Expected Return:    28.4%Consider Buy:                   Below NGN1.75Business Risk:            Average
Financial Risk:      AverageEconomic Moat:               WeakCorporate Governance: Average

Company Overview
NEIMETH prides itself on the manufacture and sale of pharmaceutical and animal healthcare products such as Pyrantrin, ncp, Pancemol, Ciklavit and Neiva Stress.  The company commenced manufacturing and distributing Pfizer brands of pharmaceutical and veterinary products in 1957. Following the management buy-out of the 60% equity stake of Pfizer Inc. (New York, USA) in Pfizer Products Plc in 1997, the company was renamed Neimeth International Pharmaceuticals Plc.  The divestment of Pfizer Inc. paved way for the launch of its own brand of healthcare products.

Management embarks on research in order that existing products can be improved on and new products developed. The company collaborates with local researchers and foreign companies to improve its product portfolio. In addition, NEIMETH continues to invest in upgrading capacity that is expected to produce cost savings.

Dr. A.B.C. Orjiako retained the board chairmanship he got in February 2005 while Mr. Matthew Azoji is the managing director of NEIMETH.

Investment Thesis
Management has transformed NEIMETH from being a licensee of Pfizer Inc. into a company developing its own brands. Brands such as Pyrantrin, ncp and Pancemol are well patronised in the market. Its relationship with Pfizer Inc. and other international brands will help bolster its product portfolio and boost revenue.

The company was turned around after years of subpar performance. It was accumulating losses owing to earnings growth instability caused by the influx of cheap imported drugs and lack of competitiveness occasioned by the high cost of importing raw materials and machinery. The management wrote off the accumulated losses in the earlier year and improved the shareholders’ fund.

Though it can meet its debt obligations, NEIMETH’s debt level has risen. It expected 38.6% of trade receivables to turn bad in 2021 as against 41.1% in the prior year. Better credit control and working capital management would prevent the company from running into choppy waters. However, NEIMETH’s long-term solvency is not threatened in our opinion.

In a bid to boost earnings, NEIMETH is placing more emphasis on research and upgrade of its manufacturing capacity. The company spent NGN344.1 million on capital in the period under review (2020: NGN564.1 million). In addition, its collaboration with local researchers should encourage the use of local materials and drive down its costs; also, it would help it find its niche in the pharmaceutical sector in Nigeria.

Management's effort at revamping the company is commendable. We believe that management can diversify its earnings base by exploring more markets outside Nigeria. Revenue from outside Nigeria (Ghana) is still less than 3% of total revenue. Furthermore, management should embark on aggressive marketing of its animal healthcare products to bolster its top line.

The company’s performance has been improving since 2018; it is hoped that the improvements would continue. Return on Equity (RoE) and Return on Assets (RoA) have started getting better. Dividend payment has also resumed. We would keep a watch on NEIMETH to see how things pan out in the nearest future.

Valuation
A share of NEIMETH is put at a value between NGN1.40 and NGN2.10. NEIMETH is trading around our fair value estimate. Therefore, we maintain a hold recommendation on the shares of NEIMETH. We expect a return of 28.4% on the stock of the company.

Financial Overview
Revenue increased by 7.3% to NGN3 billion in 2021 compared to a rise of 19.7% to NGN2.8 billion in 2020. This was due to a 13.5% growth in revenue from the sale of pharmaceutical products from NGN2.5 billion to NGN2.8 billion. Sales revenue from animal health products decreased by 34.1% or NGN125.8 million. Pharmaceutical products produced 92% of total revenue in the year under consideration compared to 87% in the previous year. Animal healthcare products, however, accounted for 8% of total revenue in 2021 as against 13% in 2020. Revenue from Ghana has grown at a compound annual rate of 7.5% in the last three years. Ghana accounted for 1.2% of turnover in the current fiscal year (2020: 1.1%).

Cost of sales climbed 20.4% in the current fiscal year while the cost of sales to turnover ratio was 52.6% up from 46.8% recorded in the prior year. Administrative cost as a percentage of turnover rose by only 0.9%; marketing and distribution cost increased by 1.2% to 19% of turnover. Gross profit went down to NGN1.4 billion, shedding 4.3% year-over-year. The company recorded an operating profit of NGN351.6 million in the period under review (2020: NGN552 million).  Profit Before Tax (PBT) and  Profit After Tax (PAT) were  NGN365.3 million and NGN270.6 million respectively. PBT jumped by 22.8% year-over-year while PAT gained 27.3% over the preceding year.  The operating profit margin lost 7.9% to close at 11.5% at the end of the 2021 fiscal year. PBT margin and PAT margin were 12% and 8.9% respectively.

Shareholders' fund swelled to NGN1.4 billion from NGN1.3 billion. The current ratio shrank by 2.8 percentage points to close at 2.3 times. The acid test ratio was more or less flat at 1.6 times. Total debt was down by 7.6% from NGN3.3 billion in 2020 to NGN3 billion in 2021. Debt accounted for 215.4% of shareholders' fund compared to 258.6% of the previous period.

Business Risk
There is stiff competition among industry players in a bid to improve market share. Although there is little brand loyalty in the industry, NEIMETH is repositioning its products to enhance its market position.  Competitive pressure and exchange rate fluctuation impact the company's earnings negatively. The company has a weak competitive advantage in the sector; this makes its revenue vulnerable to attack by both domestic and foreign drug manufacturers. Also, high indebtedness is a threat to net earnings and liquidity.

Recommendation: Hold

Earnings Chart of Neimeth International Pharmaceuticals Plc

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