Sopharma Group: It’s a capital management issue (SELL - initiation of coverage)

We initiate coverage of Sopharma Group, a Bulgarian holding with investments in pharma wholesale and manufacturing, with a SELL recommendation and a 12M price target (PT) of BGN 3.00/share (c.5% downside). The company is a leading wholesaler in Bulgaria, but inordinately inefficient working capital management, compared to peers, has resulted in high gearing (3.7x at end-1Q20) and returns on capital employed (ROCE) consistently below the company’s cost of capital. Management also deploys capital well outside the core business (e.g., Doverie Holding); together, these factors constrain Sopharma’s ability to grow at its full potential, we believe. Also, while there are synergies between the core Bulgarian manufacturing and wholesale units, we are unable to say that this is true across all businesses (e.g., in Belarus and Ukraine). We could change our view if Sopharma tames its working capital, cuts leverage, streamlines the business, and improves the reporting of operational data. At this juncture, however, we lack confidence that this process will start in the next 12 months.