Watheeqa Stock Report

Egyptian International Pharmaceutical Industries Co., (EIPICO), Egypt

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EIPICO – Watheeqa Stock Update (17-November-2009)

Update – Show me the margin of safety

Egyptian International Pharmaceuticals Industries Company (EIPICO) declared its nine months results ended September-09. The company's financial performance was broadly in line with our estimates. EIPICO continues to amaze us with its remarkable consistency. Revenue growth in 9M-09 came in at 12.3% YoY. Operating margins remained healthy at 33.5%. Net income grew by healthy 16.6% YoY, primarily driven by EIPICO's superior operating performance.

EIPICO's balance sheet remained devoid of any leverage. Cash and cash equivalents stood at EGP 367mn at the end of 9M-09, higher than EGP 294mn a quarter ago. EIPICO's cash flow conversion improved further in 9M-09 as it converted 17% of its revenues into free cash flow. Return on invested capital remained healthy at 27% at the end of 9M-09.

We continue to maintain our full year estimates for 2009 and we stick to our initial base case (EGP 33) and best case (EGP 36) intrinsic value estimates. We initiated coverage on EIPICO on 29th June, 2009 and the price then stood at EGP 26.1. We had assigned EIPICO four stars and our opinion was fairly undervalued with a 'High' margin of safety rating. However, post 1H-09 results in August, 2009 we assigned a 'Medium' margin of safety rating with the discount to our base case intrinsic value narrowing to 11%. Since then the stock appreciated by another 19% and is currently trading at EGP 34.9 per share. That's a handsome 34% return over a period of four and half months. This splendid performance, however, has fully eroded the margin of safety with EIPICO currently trading at 6% premium to our base case intrinsic value estimate of EGP 33. Hence, we assign a 'None' margin of safety rating at the current price.

Assuming we are invested in EIPICO at EGP 26.1, we would book partial profits on the stock. Business fundamentals remain more or less intact – only the market price has changed for better. However, in the current uncertain world, we would prefer to hold on to the stock partially given its consistent performance and an attractive dividend yield. We would turn into buyers again if the stock price corrects to around EGP 27.

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EIPICO – Watheeqa Stock Update (18-August-2009)

Update – Rock solid the name is consistency

Egyptian International Pharmaceuticals Industries Company (EIPICO) declared its first half results ended June-09. The company's financial performance is in line with our estimates. Revenues and net income came in at par as envisaged. Nevertheless, the remarkable consistency in EIPICO's operating metrics is indeed worth highlighting, in our view. Revenue growth in 1H-09 came in at 9.5% YoY, in line with its growth of 9.2% witnessed in the past decade. We expect the trend to continue in the future as well. Operating margins stood at 33.7%, much higher than its average of 27.1% in the past decade, owing to higher contribution from exports and better raw material cost management through its subsidiary, EIACO. Net income growth was equally consistent at 14.5% YoY, as compared to its ten-year average of 11.6%.

EIPICO continues to be a debt-free company boosted by its strong liquidity position. Cash and cash equivalents stood at EGP 294mn at the end of 1H-09, lower than EGP 413mn at the end of 1Q-09 primarily due to the outlay for dividends. We expect the cash position to improve to EGP 408mn by the end of FY-09. EIPICO converted 12% of its revenues into free cash flow in 1H-09, primarily owing to the expansion of its new facility. Nevertheless, return on invested capital (ROIC) remained healthy at 26.3% at the end of 1H-09.

We maintain our full year estimates for 2009 intact and we stick to our base case (EGP 33) and best case (EGP 36) intrinsic value estimates. We initiated coverage on EIPICO on 29th June, 2009 and the price then stood at EGP 26.1. We had assigned EIPICO four stars and our opinion was fairly undervalued with a 'High' margin of safety rating. The most recent stock price is EGP 29.4 per share. EIPICO is up 13% in less than two months. This has narrowed the margin of safety with the market price gradually inching towards our base case intrinsic value. Currently, the discount to our base case intrinsic value stands at 11%. Accordingly we assign a 'Medium' margin of safety rating at current price.

Assuming we are invested in EIPICO at EGP 26.1, we would continue to hold on to our position until the stock reaches our base case intrinsic value of EGP 33, which still offers a reasonable 12% upside from the current price of EGP 29.4. We would turn into buyers again in case the stock drops to around EGP 26 and on declines.

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EIPICO – Watheeqa Stock Report (29-June-2009)

Company Overview

EIPICO was incorporated in 1980 with a paid-up capital of LE 7mn. The company has funded the entire growth through internal accruals and has never gone to its shareholders to fund its expansion. In 1999, EIPICO revalued its assets owing to merger with its subsidiary, Egyptian Company for Pharmaceutical Packaging, taking its total paid-up capital base to the current LE 720mn.

EIPICO is the largest private manufacturing company in Egypt with a 10-12% market share in domestic sales. EIPICO has manufactured 255 products since its commencement and the current annual output is around 180-200 products. EIPICO has licensing agreements with several MNC players like Glaxo, Pfizer, HEK Pharma, Rohnepoulenc, to name a few.

EIPICO has the largest production capacity in the Middle East, successfully adhering to the relevant global conditions required to manufacture pharmaceutical products. It has 9 branches across Egypt covering Sohag in Upper Egypt to Alexandria in Northern Egypt, facilitating faster deliveries across Egypt.

EIPICO is currently operating at 100% capacity utilization rate with a turnover of LE 1bn. However, the company has started investing in a new facility spread over 30,000 sq. metres. The company has entered into contracts with German manufacturers for import of its machinery and expects it to get the same installed over next 2 months time. The new plant is expected to increase its production capacity by 30% and is expected to commence production in 2010. The estimated cash outlay for the new facility is LE 300mn and half the amount has already been spent by the company over the past two years.

EIPICO has a 98.8% owned subsidiary in the form of Egyptian International Ampoules Company (EIACO), with a designed capacity of 800mn units per annum. EIACO’s net profits stood at LE 8.8mn in FY08. EIPICO’s total investments in EIACO stood at LE 79mn at the end of 1QFY09. EIPICO has established a factory in Saudi Arabia named, “Universal for Pharmaceutical Production”. EIPICO has a 30% stake (investment of LE 27.7mn) in Universal, with the balance being held by Al Batargi Group (40%) and PHARCO (30%). EIPICO also owns 98.6% in EIPICO Tech and has invested LE 11.6mn till date.