Robust earnings priced in; Downgrade to Neutral
Delivering on promised growth, but valuation is rich. ISP closed 2018 with a c20% market share (+2pp y-o-y), with revenue growth of 39% y-o-y, ahead of the market’s 25%. We assume retail pharma market will grow at 2019-21e CAGR of 21%, 9% of which is volume driven and the balance on pricing. We expect ISP’s network expansion will boost its retail market share to 24.4% by 2023, yielding a 2019-21e clean EPS CAGR of 35%, well ahead of peers’ 7%. Nonetheless, ISP’s strong rally (6M +45% vs. +8% for EGX), boosted by solid results and possible resolution of its court case, left valuation stretched. ISP’s valuation premium to peers (2019e P/E of 23x vs. 13x) already prices in future growth. We downgrade our rating to Neutral, on rich valuation, but raise our TP by 8% to EGP14.0/share, as we tweak our market growth forecasts. We see Cleopatra Hospitals Group (CHG) as a better play on Egypt’s healthcare sector.
Upside lies in accelerated market share gains, unforeseen price hike. Retail (69% of the pharma market, 70% of ISP’s sales) is the main driver for growth (2015-18 CAGR of 26% vs. 14% for wholesale). However, we argue that market share gain in the retail segment is more challenging, given that it is less fragmented vs. wholesale (32% vs. 61%). Over 2011-18, the top three players (68% combined market share of retail) garnered share from fragmented players. Each +/-1% market share for ISP vs. our base case yields +/-7% to our TP. We assume the average selling price (ASP) will marginally grow below inflation (2019-21e CAGR of 11% for end retail), mainly driven by sales mix, ruling out the possibility of further one-off price hikes. Each +/-10% ASP yields +/-13% to our TP, all else constant.
Court case almost behind us; Growth strategy unchanged. On 19 February, the appellate court ruled to reduce the fines on ISP to EGP160mn from EGP2bn, while ISP maintains the right to appeal the verdict. Assuming ISP will pay the EGP160mn fine would knock a minor 2% off our TP; ISP took related provisions of EGP70mn in 2017-18. Expanding reach is vital to deliver on growth. We expect ISP will grow its network to 71 site by 2021, from 59 in 2019, adding 4 new sites p.a..
Ibnsina Pharma Co is an Egypt-based pharmaceutical distribution company. The Company distributes a portfolio of pharmaceutical products from over 350 Egyptian and multinational companies to more than 35,000 customers including pharmacies, hospitals, retail outlets, and wholesalers. Ibnsina Pharma Co's nationwide distribution network with more than 50 operational sites, including distribution hubs and central warehouses, is supported by a fleet of approximately 600 vehicles. The Company's main services for suppliers include management of warehousing and logistics for pharmaceutical products as well as the development and execution of tailored marketing solutions targeting a nationwide database of customers.
CI Capital is a diversified financial services group and Egypt’s leading provider of leasing, microfinance, and investment banking products and services.
Through its headquarters in Cairo and presence in New York and Dubai, CI Capital offers a wide range of financial solutions to a diversified client base that include global and regional institutions and family offices, large corporates, SMEs, and high net worth and individual investors.
CI Capital leverages its full-fledged investment banking platform to provide market leading capital raising and M&A advisory, asset management, securities brokerage, custody and research. Through its subsidiary Corplease, CI Capital offers comprehensive leasing solutions, including finance and operating leases, and sale and leaseback, serving a wide range of corporate clients and SMEs. In addition, CI Capital offers microfinance lending through Egypt’s first licensed MFI, Reefy.
The Group has over 1,700 employees, led by a team of professionals who are among the most experienced in the industry, with complementary backgrounds and skill sets and a deep understanding of local market dynamics.
CI Capital has been recognized as the “Best Investment Bank in Egypt” by EMEA Finance for four years running from 2013-2016, and by Global Finance in 2014 and 2015.
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