EUR 20.00 For Business Accounts Only

Neuca - 3Q19E financials

Since we issued our LT fundamental Buy recommendation and ST market-relative Overweight bias for the Company’s shares their market price has gained 44% (57% relative performance); still we maintain our ratings for the Company. We increase our 12M EFV for the Company by 19%, to PLN 396, from PLN 333.5 per share.
The Company’s results are supported by the strong performance of the pharmacies’ market with favorable for the Company changes in the market structure, namely (i) expanding pharmacy market (up by 6% in 3Q19E; strong dynamics at the beginning of October due to a high level of seasonal infections, (ii) decline in the number of pharmacies (more than 2,000 pharmacies closed over the past two years, Neuca wasn’t the main supplier to 80% of them), and as a result of (iii) rising sales at an average pharmacy (up by 16% within two years). These market trends allow Neuca to optimize logistics costs (growth of the average package value).
Additionally, the Company has been increasing its virtual networks, mainly Partner+ and IPRA (up by 806 this year, to 2,005 pharmacies). The aforementioned programs guarantee Neuca (i) higher retention rate (lower cost of client’s maintenance) and (ii) higher sales of own brand products. This was already partially visible in the Company’s 2Q19 financials, yet should be noticeable in the following quarters.
Taking into account the aforementioned factors, we hope to see strong 3Q19 financials with Neuca’s NP at PLN 26 million, up 16% yoy on a recurring basis. We increase our FY19 NP forecast to PLN 125 million, by 7% vs our previous projection. The Company has a potential to generate much higher bottom line this year, in our view. Yet, given fast changes in the pharmacies’ market, we believe the Company will be more prone to invest in further development of virtual networks securing its long term results than to surprise the market with an amazing this year figure.
The businesses developed within the framework of the so called “patients strategy” positively contribute to the Company’s results (9% of the Group’s 1H19 EBIT) and we hope this trend to be continued. We perceive the segment of CRO/SMO as the most promising, including potential acquisitions. Yet, it should be stressed that a strategic decision of fast development in this business segment may result in a significant growth of the payroll costs (hiring specialists in Europe). The domestic rehabilitation equipment market, where the Company has started its expansion, is worth PLN 11 billion. With own brand of equipment and reimbursement made directly at a pharmacy, the Company might become a real threat to existing rehabilitation shops.