EUR 44.69 For Business Accounts Only

ISPH EY | Industry potential overlooked

Best play on industry dynamics. ISP is best-positioned among healthcare listings to capture Egypt’s: i) post COVID-19 normalisation within the pharma market, ii) digitalisation and B2B e-invoicing displacing small, informal players, and iii) higher public spending. The stock is one of our high-conviction ideas for 2022. Having underperformed the EGX30 by 36% y-o-y, ISP trades on a 2022e P/E of 9.1x, 22% below its two-year average of 11.7x. Our 2022 EPS implies 23% y-o-y growth, ~10% below guidance, mainly because our model does not give weight to working capital targets, which would significantly drive our TP up by EGP1.90/share.

Public spending ramping fast. We introduce ten-year projections in this report for healthcare spending in Egypt, to quantify government plans to raise public spending to 3% of GDP (2030 Vision), up from 1.5% in FY21. Thanks to Egypt’s FY15/16 budget reforms, there is increased fiscal room, accompanied by a target for health insurance for all citizens by 2030. Early signs confirm increased public spending, with ISP’s 9M21 tender business (c15% of sales) rising 33% y-o-y. Our industry model suggests total pharma sales will grow at a higher 2021-30e CAGR of 24% vs. 19.6% historically, predominantly driven by universal health insurance.

Improved working capital could boost valuation by 38%. There are three main verticals that ISP’s optimisation strategy centre around: i) better opex control (3.6% of sales in 2021e vs. historical 4.5%), ii) more of an asset-light model mainly via a new generation of tiered warehouses, lowering capex to EGP150mn p.a. (0.7% of sales in 2021e vs. 2015-20 avg. of 1.8%), and iii) a target to sustain a cash cycle of (1) to one day vs. our estimate of 13 days, and 8 days in 9M21a. Our view is that it may prove challenging to achieve this in a backdrop of increased tenders by the public sector, while we wait for results on efforts to reduce inventory days.  

Profitability possible through weaker EGP. Unlike pharma manufacturers, ISP should be a net beneficiary of currency weakness which leads to higher drug prices, and in turn absolute profitability for ISP. The risks to our Overweight recommendation are: i) higher-than-expected labour cost inflation (salaries make up c60% of opex); according to ISP, c95% of its labour earn above the recently announced private sector minimum wage, and ii) unfavourable changes in the competitive landscape. ISP has since listing been successful in growing its market share to 22% from c13% in 2013.