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1299134285SQURPHARMA Feb11
1299134285SQURPHARMA Feb11
parvez@bracepl.com
Square Pharmaceuticals
DSE: SQURPHARMA Bloomberg: SQUARE:BD
52-week Price Range (BDT) Current Price 12-month Target Price Cash Dividend BDT Total Return Number of Shares MM Free Float Average daily volume MM BDT BDT mn Net Sales Ops Income Net Income Margins Gross Margin Operating Margin Net Margin Growth Revenue Growth Operating Profit Growth Net Profit Growth Per Share BDT EPS Dividend Book Value/Share Cashflow BDT mn NC Working Capital Capex Dividend Valuation P/E P/B ROE Miscellaneous BDT mn Total Debt Cash Debt/Equity 2,841 - 4,362 3,092 3,850 42 26% 20 46% 184.1
Square Pharmaceutical Limited (SPL) is the largest pharmaceutical company in Bangladesh, with the largest domestic market share of 19.3%, in what is a highly competitive pharmaceuticals market. Return on equity has been improving, gradually moving up to 19% for the last couple of years. Margins have been improving steadily. SPL currently boasts one of the highest gross margins (51%) in the industry. Massive expansion significantly. plan, which will increase current capacity
2010A 2011E 2012E 12,971 15,663 19,141 3,326 2,497 3,858 3,358 4,764 4,251
2010A 2011E 2012E 51% 22% 17% 51% 21% 18% 51% 21% 19%
2010A 2011E 2012E 10% 14% 21% 21% 16% 34% 22% 23% 27%
SPL has been gearing up to transform itself into a big exporting company focusing on attaining certifications from regulators of developed markets. SPL has been one of the most resilient stocks in the face of severe market correction among all the stocks in BRAC EPL coverage universe.
2010A 2011E 2012E 4,024 1,493 483 4,867 1,471 528 5,621 1,923 827
2010A 2011E 2012E 24.3x 4.7x 19% 18.1x 3.7x 21% 14.3x 3.0x 21%
We maintain an OUTPERFORM rating for Square Pharmaceuticals. We also set a 12-month fair value of BDT 3,850. Our recommendation considers the sound business model of the company, future outlook, good corporate governance, and the stocks resilience despite extreme volatility in the market. Our recommendation is based on an estimated 2012 EPS of BDT 217 and a conservative estimated P/E multiple of 18x. With an estimated dividend yield of 1% in 2011, this target price implies an estimated total return of 26%.
Square Pharmaceuticals - Last 12 Months
Billions
85 80 75
2010A 2011E 2012E 2,524 270 23% 1,815 608 14% 1,427 1,797 9%
70
65 60 55 50
45
40
Part of the Square group of industries, Square Pharmaceuticals, is the largest pharmaceutical company in Bangladesh
Others 20%
MNCs 13%
Top Companies Square Pharmaceuticals Incepta Pharmaceuticals Beximco Pharmaceuticals Opsonin Pharmaceuticals Eskayef Pharmaceuticals Acme Laboratories Renata Limited ACI Limited Aristopharma Drug International Sanofi-Aventis GlaxoSmithKline Novo Nordisk Sandoz Novartis Others Total
Pharmaceuticals and Beximco Pharmaceuticals with market shares of 8.5% and 7.6% respectively. Incepta and Beximco had BDT 4.9 billion and BDT 4.4 billion in domestic sales for the last four quarters. Although a number of MNCs are operational in Bangladesh, no MNC is among the top ten in terms of domestic sales. The most important therapeutic group in the Bangladeshi market is Systemic Antibiotics. These account for almost 30% of the market. The second therapeutic group, Anti-acids, is much less relevant in terms of market share, as well as from a public health perspective. Vitamins, Analgesics, Mineral supplements, Cough and Cold preparations and muscle relaxants also figure prominently. It is to be noted that typical developed-market therapeutic groups like those addressing diabetes, cardiovascular diseases, allergies or psychological disorders also are among the most important in Bangladesh, whereas HIV/AIDS and Antimalarial drugs are not. Because Bangladesh API capacity is insignificant, pharmaceutical companies import approximately 80% of their APIs. Coupled with the necessity to import machines, it is one of the main disadvantages in terms of cost when compared to India. The leading manufacturers are therefore
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Table 2: Comparative performance in 1H11 BDT Mn Net Sales COGS Gross Profit Operating Expenses Profit from Operations Other Income Allocation for WPPF EBIT Financial Expenses PBT Income Tax PAT P/L from Associate Undertaking Minority Interest NPAT EPS 1H11 8,042 4,448 3,595 1,411 2,183 161 109 2,235 114 2,121 495 1,627 185 1 1,810 92.3 1H10 YoY 6,476 24% 3,427 30% 3,049 18% 1,153 22% 1,896 15% 107 50% 90 21% 1,913 17% 160 -29% 1,753 21% 409 21% 1,344 21% 47 292% 1 59% 1,391 30% 70.9 2Q11 2Q10 YoY 4,136 3,302 25% 2,270 1,741 30% 1,866 1,561 20% 742 573 29% 1,124 988 14% 68 55 23% 56 48 17% 1,136 995 14% 74 86 -14% 1,062 909 17% 253 212 19% 809 697 16% 95 25 287% 0 0 78% 904 721 25% 46.1 36.7 1Q11 1Q10 YoY 3,906 3,174 23% 2,177 1,686 29% 1,729 1,488 16% 670 580 15% 1,059 908 17% 93 52 78% 53 42 25% 1,100 918 20% 40 74 -45% 1,059 844 25% 241 196 23% 818 648 26% 89 23 297% 0 0 42% 907 670 35% 46.2 34.2 2Q11 4,136 2,270 1,866 742 1,124 68 56 1,136 74 1,062 253 809 95 0 904 46.1 1Q11 3,906 2,177 1,729 670 1,059 93 53 1,100 40 1,059 241 818 89 0 907 46.2 QoQ 6% 4% 8% 11% 6% -27% 6% 3% 84% 0% 5% -1% 7% 9% 0%
Sales and Margin Because of its dominating presence throughout the country, SPL has enjoyed steady growth in sales volume. Cost of sales as percentage of sales has also been declining gradually over the year, improving gross margin. However, operating expense as a percentage of sales have been
Table 3: Sales and margins Gross Sales (BDT Mn) Cost of Sales/Sales Operating Costs/Sales Net Margin 2006 2007 2008 2009 2010 2011 2012 2013 8,252 9,958 12,024 13,585 15,034 18,155 22,187 27,898 55% 54% 54% 52% 49% 49% 49% 49% 12% 14% 15% 14% 15% 16% 16% 16% 16% 15% 13% 15% 17% 18% 19% 19% 4
Table 4: Subsidiaries and Associates of Square Pharmaceuticals Name Square Pharmaceuticals Square Cephalosporins Square Biotechs Square Multi Fabrics Square Textiles Square Hospitals Ltd. Square Knit Fabrics Ltd. Square Fashions Ltd. NHFIL CDBL United Hospitals Pioneer Insurance % Owned by SPL 100.00% 99.48% 99.25% 99.50% 46.45% 49.56% 48.84% 48.46% 5.22% 2.89% 0.86% 10.00% Market Value (BDT Mn) 53,754 7,365 66 249 6,085 3,882 1,628 2,095 230 10 12 219
There are currently three companies in which SPL has made a majority investment.
Square Cephalosporins: SPL holds 99.48% of Square Cephalosporins Ltd. (SCL). SPL also has BDT 400 million as share money deposit in SCL on top of the BDT 95,000,000 equity holding. The subsidiary has become profitable very quickly after it went into operation in 2007. SCL owns a modern pharmaceuticals factory and produces and sells pharmaceuticals, drugs and medicines. Square Biotechs: SPL holds 99.25% of Square Biotechs Ltd. (SBL). SBL was established to carry on the business of inter alia manufacturing, sales and distribution of all kinds of biotechnological medicines or drugs. The company has not yet become profitable. Square Multi Fabrics: SPL holds 99.50% of Square Multi Fabrics Ltd. (SMFL). Besides the equity holding of BDT 9,900,000 SPL also has BDT 150,000,000 as share money deposit in the company. SMFL was established to carry on the business of manufacturing and marketing all types of knit fabrics, yarn, garments for gents, ladies and children. This company also has not become profitable yet.
Square Textiles Square Knit Fabrics Square Fashions Square Hospitals United Hospitals National Housing and Finance Pioneer Insurance Central Depository Bangladesh Limited (CDBL) Square Informatix
Investment in Marketable Securities The currently holds marketable securities amounting to BDT 221 million with an unrealized gain of BDT 167 million. Expansion Program In order to meet increasing demand in the domestic as well as foreign markets, SPL has undertaken an ambitious expansion program to be completed in two phases. The first phase, which is already under way, is expected to be completed by 2012 at a total cost of BDT 3.6 billion. We anticipate a 25% cost overrun for a final cost of BDT 4.5 billion. The first phase is expected to nearly double the current capacity. The second phase will start in 2014, completing in 2017 for a total cost of BDT 2.0 billion (including an estimated cost overrun of 25%). We expect the expansion programs contributing to revenue growth after 2012. We made an assumption that the new plants will operate with an 85% efficiency and after the year of completion, 25% of the capacity will come on line in each of the following four years. Second phase will also do the same.
Table 5: Local sales vs export Local Sales Export Sales Total Sales Local Sales Growth Export Growth Total Sales Growth 2008 9,353 212 9,566 10% 10% 10% 2009 11,030 336 11,367 18% 58% 19% 2010 12,915 365 13,279 14% 60% 17% 2011 15,239 547 15,786 18% 50% 19% 2012 18,287 820 19,107 20% 50% 21% 2013 22,859 1,189 24,048 25% 45% 26%
Ambitious expansion program will increase capacity significantly. But revenue contribution may come after 2012.
International Market Square is one of the leading exporters of pharmaceutical products from Bangladesh. However, the contribution of export to the total sales is still
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Outlook The company has done very well to maintain its margins. However, we anticipate an ever-competitive market where pharmaceutical companies lower prices and give up margins to retain market share. This could affect bottom lines of all pharmaceutical companies in Bangladesh. However, given Squares market share, it seems to be in a better position than most other companies. In Bangladesh, the pharmaceutical companies have no power to set prices for essential drugs, a list of lifesaving drugs decided by the government. Only the government has the power to decide prices of these drugs and price revisions by the government are few and far between. Therefore, pharmaceutical companies make marginal profits from these drugs. However, the companies are free to set prices on products outside of this list. So, the companies make the bulk of their profits from these nonessential drugs. Even then, they cannot set prices too high as the purchasing power of the population is low. Hence, they are forced to be content with prices lower than they would expect. We believe if SPL focuses more on the international market, it could overcome some of the problems above. The same drugs that SPL sells for Tk. 10, for example, could be sold at prices several times higher in Australia, the UK or even the USA because of the enhanced purchasing power of consumers in those markets. As a result, we think its sales volume could grow significantly over the years. On the other hand, because of the strict quality controls and regulations in the developed market such as Europe and the USA, SPL will need to continuously maintain and renovate its manufacturing plants. This means it is expected to have a large outflow in capital expenditure each year. SPL
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Competition may reduce margins for most players in the long run
3,738
* All EPS and BVPS figures are from audited reports of latest fiscal year of the respective
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