Northward Trend in Top-line Persists: Fidson Healthcare Plc (FIDSON) continued where the previous year’s revenue chase left off, bringing FY2018 to a close of NGN16.23bn which translates to a growth of 15.45% (vs. NGN14.06 in FY2017). Increase in sales volume, on the back of demand steadiness has been the main driver of growth considering the supplydemand gap for medications in Nigeria. The ethical unit made its debut as a driver of growth, accelerating by 35.56% to deliver a revenue of NGN9.09bn from NGN6.71bn in FY2016.
Although, revenue generated from Over-the-counter medicines and Consumer Unit
declined by 2.56% and 25.05% respectively, the proceed from the sales of ethical products
was sufficient to offset the dip. The revenue decline in these business segments was an
upshot of price reduction by some market players in the generics space (Over-The-Counter,
Multivitamins) and declining market share in the consumer unit, amongst others. On the
back of increased government partnerships, growing demand for the firm’s products and
the introduction of new high-margin products, we have made a revenue growth projection
of 18.89%, which implies FY2019 revenue of NGN19.30bn.
Costs Tread Unexplored Path: For the first time since 2012, cost to sales ratio shot
upwards to 61.06% in 2018FY from 49.10% in 2017FY. The surge in the cost of importing raw materials on the back of regulatory issues faced by Chinese manufacturers, congestion
of the sea ports and cost of transporting raw materials to the plant, contributed immensely
to the spike in cost. Operating expenses took a different twist, declining marginally by 4.02% to settle at NGN4.52bn from NGN4.71bn. Consequently, gross margins took a dip from 50.90% to 38.94% and net margin from 7.55% to -0.60%. The outlook on cost is significantly dependent on the extent to which the pressure points surrounding costs are resolved.
We are projecting a marginal decline in cost to sales ratio to 57.50% aligning with management’s guidance on expected energy cost reduction and sea ports decongestion, amongst others.
More so, we expect that the projected revenue growth would be sufficient to cushion the
sharp effects of costs. In this light, we have projected an operating margin of 16.20% and
net margin of 8.73% on the back of improved revenue growth, costs moderation and tax
High Leverage and Weak Working Capital Profile Fraught Balance Sheet: Sequel to the construction of its biotech plant, the firm accumulated series of interest-bearing debts,
bringing the firm’s total debt to NGN5.83bn (vs. NGN2.99bn in FY2017). The surge of 71.19% in interest bearing loans fed deeply into PBT in form of a 92.18% spike in finance charges by 2018FY. The firm intends to pay down outstanding loans with 60.57% of the rights issue proceeds (NGN1.82bn) and 36.67% to finance working capital.
Recommendation and Outlook: Based on management’s guidance and coupled with our
outlook, we are positive that a build-up of factors such as the demand-supply gap in the
Nigerian infusions market, the firm’s market share, the introduction of about 20 highmargin products, and increase in the price of several products will provide a potentially
viable platform to drive revenue and earnings growths in the near term. In this light, we
have slightly reviewed our initial target price of NGN5.87 to NGN5.90 using a target EPS of
NGN0.75(NGN-0.06 in 2018FY) and target P/E of 7.90x.