Neimeth International Pharmaceuticals Plc

NEIMETH INTERNATIONAL PHARMACEUTICALS PLC

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 which is expected to produce cost savings.

Dr. Orjiako chairs the board of directors while Mr. Chris Mmeje has been appointed acting managing director following the resignation of Dr. Ebere Igboko Ekpunobi in September, 2017. Mr. Chris was the finance director of the company before his appointment.

Investment Thesis
Management has transformed NEIMETH from being a licensee of Pfizer Inc.  to 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 product portfolio and boost revenue.

However, the company's performance in the past few years has been below par. It has been accumulating losses owing to lack of earnings growth stability caused by influx of cheap imported drugs and lack of competitiveness caused by high cost  of importing raw materials and machinery. Shareholders' fund has been eroded by 18.6% in the past three years. Fire at its Oregun factory in the current year has aggravated the situation. Raw materials, equipment and part of the building were destroyed and inventory of NGN323 million was written off.

Besides, NEIMETH is becoming bogged down with debts and a bulk of the term loan is short-term in nature.  Foreign indebtedness is 65.7% of term loans. The company owed Daewoo Securities (Europe) Limited NGN521.6 million (JPY192.3 million)  as at 30th September, 2017. We are of the opinion that better working management would prevent the company from running into choppy waters. However, NEIMETH's long term solvency is not threatened in our opinion.Earnings chart of NEIMETH

In bid to boost earnings, NEIMETH is placing more emphasis on research and upgrade of its manufacturing capacity. Capital spending has been on the rise; the company spent cash of NGN223 million on capital in the period under review (2016: NGN120.1 million). In addition, its collaboration with local researcher should encourage the use of local materials and drive down its costs; also, it would help it find its niche in the pharmaceutical industry in Nigeria.

Management's effort at revamping the company is commendable. We are of the opinion that management can diversify its earnings base by exploring 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.

Return on Equity (RoE) and Return on Assets (RoA) are not encouraging at the present moment. But we expect management to turn around the company's performance in the medium term. NEIMETH trades below our fair value estimate ranging from NGN1.4 to NGN1.9 per share. We would keep a watch on NEIMETH to see how things pan out in the nearest future.

Valuation
A share of NEIMETH is estimated between NGN1.4 and NGN1.9. We expect a return of 59.5% in three years' time. Though it trades at a hefty discount to our estimate, we would maintain a hold on its share in the light of its current business fundamentals.

Financial Overview
Revenue dipped by 23.4% in 2017 compared to a rise of 37% of 2016. This is due to a fall in revenue from sale of pharmaceutical products which was 24.4% down from NGN2 billion to NGN1.5 billion. However, revenue from animal health products increased by 41.4% compared to 51.7% decrease in the previous year. Though it accounts for 2.9% of turnover (2016: 0.9%), revenue from Ghana has grown at a compound annual rate of 36.3% in the last three years.

Cost of sale decreased by 22.2% while cost of sale to turnover ratio was more or less flat at 39%. Administrative cost as a percentage of turnover rose by 16.2%; marketing and distribution cost added 4.8% to close at 20.9% of turnover. Profitability deteriorated in the period under consideration. Gross profit moved to NGN929.3 million from NGN1.2 billion losing 24.1% year-on-year. The company recorded an operating loss of NGN43.6 million in the period under review, Loss Before Tax of NGN404.9 million and Loss After Tax was NGN411.5 million.  Operating profit margin, Profit Before Tax (PBT) margin and Profit After Tax (PAT) margin were negative.Graph of returns of NEIMETH

Shareholders' fund shed 34.1%. Current ratio lost 50 basis points to close at 1.4 times while acid test ratio declined from 1.3 to 0.8, a 35.2% decrease. Though term loan was down from NGN936.7 million to NGN794.3 million, they account for 98.6% of shareholders' fund compared to 76.6% of the previous period. There was neither operating profit nor operating cash flow to pay off interest obligations.

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 no competitive advantage in the industry which makes its revenue vulnerable to attack by both domestic and foreign drug manufacturers. Also, increased indebtedness is a threat to net earnings and liquidity.

Recommendation: Hold

Vital statistics of NEIMETH