Equity
ANALYST VIEW - Deutsche Bank upgrades Hungary's Richter
“Our previous Sell rating was predicated on our belief that at 14.1x 2006E EBITDA and 18.4x earnings, investors were willing to pay an excessive price for the growth potential in Russia and the early-stage development of innovative compounds - with uncertain outcome," Gergely Várkonyi of Deutsche Bank said.
He added that the valuation was still “a bit stretched", but the 6% downside (previously 18%) warranted an upgrade.
The analyst reiterated his earlier view that the market “had a myopic reaction" to Richter's Q1 results (released on 5 May).
While headline earnings suggested that Richter beat expectations by 28%, Várkonyi said he believed that one-off or ‘fortunate' factors amounted to 39% of earnings, meaning that Richter actually fell short of consensus by as much as 21%. While consensus does not expect the record first-quarter results to be repeated in the coming quarters, the analyst said investors could still be disappointed by leaner results.
While Várkonyi said that Russia's new subsidy programme should support the country's immense growth potential among others, he warned against ignoring three factors:
Among key risks he mentioned further dollar weakness, adverse changes to the Russian and Hungarian drug subsidy regimes, disappointing results from the clinical trials of innovative compounds currently under development and higher than expected opex.
He added that the valuation was still “a bit stretched", but the 6% downside (previously 18%) warranted an upgrade.
The analyst reiterated his earlier view that the market “had a myopic reaction" to Richter's Q1 results (released on 5 May).
While headline earnings suggested that Richter beat expectations by 28%, Várkonyi said he believed that one-off or ‘fortunate' factors amounted to 39% of earnings, meaning that Richter actually fell short of consensus by as much as 21%. While consensus does not expect the record first-quarter results to be repeated in the coming quarters, the analyst said investors could still be disappointed by leaner results.
While Várkonyi said that Russia's new subsidy programme should support the country's immense growth potential among others, he warned against ignoring three factors:
- the subdued growth outlook of Hungary, US and ROW (which account for 50% of sales vs. 24% for Russia),
- the gross margin pressure from the dollar's weakness, and
- rising marketing and R&D expenses as a % of sales.
Among key risks he mentioned further dollar weakness, adverse changes to the Russian and Hungarian drug subsidy regimes, disappointing results from the clinical trials of innovative compounds currently under development and higher than expected opex.
