MAYBAKER 9M 2019: Margins Improve Despite Revenue Contraction


Pharmaceutical Revenue Takes a Hit

MAYBAKER reported a decline in its top-line of 9.57% to NGN5.92bn (vs. NGN6.54bn in 9M:2018). The pharmaceutical unit (which contributes c.98% to total revenue) recorded a revenue of NGN5.86bn in 9M:2019, 6.95% lower than in 9M:2018. The decline is attributed to the industry-wide reduction in prices of Over-The-Counter (OTC) products, in light of constrained purchasing power of consumers and intense competition. The beverage unit however, recorded some level of resilience, inching upwards by 9.18%, to print at NGN57mn. In the absence of new products development (or commercialization of NIPRISAN), the decline in revenue is expected to linger in the near term. Against this backdrop, we have revised our 2019FY revenue projection downward to NGN8.17bn, implying a revenue contraction of 4.52%.

Surge in Administrative Expenses Wipes out Cost Savings

Cost of sales declined by 9.69% to NGN3.75bn pegging cost-to-sales at 63.45% (vs. 63.53% in 9M:2018). In the same vein, distribution and marketing expenses declined sharply by 22.69% to NGN757mn. Contrary to the aforementioned, administrative expenses increased by 16.59%, wiping out the cost savings from direct costs and distribution expenses. The double whammy of a shrinking top-line and increasing operating expenses resulted in a fall in operating profit, which dropped by 5.78% YoY to NGN841mn (vs. NGN893bn in 9M:2018). Nevertheless, operating margin improved slightly to 14.22% (vs. 13.65% in 9M:2018). By 2019FY, we expect cost to sales to settle even lower at 61.97%, given the downtrend so far in the year and historical trend.

Margins Improve Across Board

Following the completion of its rights issue, the firm paid off its long-term debts entirely while also reducing its current debts by 35.46%. Consequently, finance costs declined by 41.55% to NGN176mn (vs. NGN301mn in 9M:2018). Overall, net margin improved to 8.01% from 6.34% in the corresponding period. In the coming period (2019FY), we expect finance cost to temper further, thereby giving room for PBT and PAT to settle at healthy levels -11.78% (vs. 10.58% in 9M:2018) and 8.02% (vs.5.02% in 9M:2018) respectively. Earnings quality also improved as cash generating from operating activities came in higher than net profit, resulting in a net operating accrual of NGN67mn.

Outlook and Recommendation

Given the aforementioned, we are maintaining our target P/E of 6.40x and expected EPS of NGNO.34, implying a target price of NGN2.16 on the ticker. This implies an upside potential of 8.00% to its last traded price (NGN2.00).

Therefore, we rate as HOLD.

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