Equity
ANALYST VIEW - Erste lifts TP, profit forecasts for Hungary's Egis
“We believe that Egis' share price already more than adequately incorporates the home market related risks. Egis' fundamentals remain sound, and healthy export growth should largely offset home market woes in the medium term," Erste's Vladimira Urbankova noted.
The analyst maintained her ‘Accumulate' recommendation on the stock.
While Egis' Q4 2005/06 results were relatively solid, they lagged behind both bullish market expectations and Erste's forecasts. Nevertheless, the 2005/06 progress tempo was still at an excellent 20.3% y/y on the top line and 50.6% y/y on the bottom line.
“Plagued by the government austerity package and restrictive drug market regulations (to be only partially counterbalanced by healthy export growth), Egis' performance in 2006/07 is set to be less impressive," Urbankova said.
With 2005/06 results only slightly behind Erste's projections and the calculable impact from the negative home market measures and the unfavorable changes to the Russian DLO list already reflected in the bank's previous forecasts, the analyst said her adjustments to Egis' model were minimal, reflecting the latest changes to the drug rebate rate and fees for sales network.
The persistent worries about the negative impact of the domestic regulatory measures recently depressed Egis' share price. However, Urbankova noted that her revised target price of HUF 31,535 per share indicateed that the sell-off was overdone.
DLO
Egis's sales to Russia enjoyed solid support from the DLO program, the Russian drug subsidy scheme for socially handicapped people.
The January 2006 revision of the list of reimbursed products increased the number of Egis products on the list to 21 product families in some 40 presentations. The changes to the DLO list coming into effect from 1 November this year trimmed the total number of Egis products to 27 from the earlier 40. According to CFO Marosffy, Egis' sales within the DLO program will be cut by USD 4 million per year as a result of this move.
As the negative impact of the DLO list changes was already incorporated into Erste's earlier projections, based on better than envisaged 2005/ 06 sales figure, Urbankova made a minor upward correction to her Russia sales target to USD 119 m for 2006/07, corresponding to a 25% yr/yr rise.
“Reflecting the hefty tempo in Ukraine and other CIS markets, we see the sales growth in Russia/CIS reaching 30% y/y to USD 166.7mn in 2006/07," she said.
Eastern Europe
Egis' Eastern European sales growth in 2005/06 was slightly behind Erste's projections, delivering sales of USD 87.7 m (vs. forecast of USD 90.1 m). Urbankova assumes that Egis' sales in the key Polish market will gradually pick up, and along with the fast advancing Romania, lift the 2006/07 sales tempo to around 15% yr/yr.
New domestic drug subsidy law
Erste continues to assume that other expenses of Egis will be dragged down by the domestic drug subsidy payback. While the earlier draft of the law called for a 14% charge for drugs that carry a fixed subsidy and 16% for drugs which carry a non-fixed subsidy, the newly approved Drug Economy Law unified the rebate to a flat 12% of the subsidy amount, regardless of the drug category.
Consequently, with the corresponding company's guidance for the annual negative impact cut from HUF 2.8 bn to HUF 2.4 bn, Urbankova revised her assumption regarding Egis' drug subsidy payback to HUF 1.77 bn from around HUF 2.17 bn in 2006/07.
New operating profit target
Urbankova set her new operating profit target for 2006/07 to HUF 15,291 m, marginally above the previous value of HUF 14,891 m.
“With the positive impact from the lower rebate to be largely wiped out by higher fees for sales and marketing staff (only partly helped by staff cuts), we see the EBIT margin in 2007/08 at some 15.3%," she added.
New net profit target
Bolstered by solid financial result, but depressed somewhat by solidarity tax (at 4% of the tax base), net profit is expected to reach HUF 15.8bn in 2006/07, the analyst said. Her earlier forecast for net profit was HUF 15,412 m. Urbankova projects a 15.5% yr/yr increase in net profit to HUF 18,256 m for 2007/08.
The analyst maintained her ‘Accumulate' recommendation on the stock.
While Egis' Q4 2005/06 results were relatively solid, they lagged behind both bullish market expectations and Erste's forecasts. Nevertheless, the 2005/06 progress tempo was still at an excellent 20.3% y/y on the top line and 50.6% y/y on the bottom line.
“Plagued by the government austerity package and restrictive drug market regulations (to be only partially counterbalanced by healthy export growth), Egis' performance in 2006/07 is set to be less impressive," Urbankova said.
With 2005/06 results only slightly behind Erste's projections and the calculable impact from the negative home market measures and the unfavorable changes to the Russian DLO list already reflected in the bank's previous forecasts, the analyst said her adjustments to Egis' model were minimal, reflecting the latest changes to the drug rebate rate and fees for sales network.
The persistent worries about the negative impact of the domestic regulatory measures recently depressed Egis' share price. However, Urbankova noted that her revised target price of HUF 31,535 per share indicateed that the sell-off was overdone.
DLO
Egis's sales to Russia enjoyed solid support from the DLO program, the Russian drug subsidy scheme for socially handicapped people.
The January 2006 revision of the list of reimbursed products increased the number of Egis products on the list to 21 product families in some 40 presentations. The changes to the DLO list coming into effect from 1 November this year trimmed the total number of Egis products to 27 from the earlier 40. According to CFO Marosffy, Egis' sales within the DLO program will be cut by USD 4 million per year as a result of this move.
As the negative impact of the DLO list changes was already incorporated into Erste's earlier projections, based on better than envisaged 2005/ 06 sales figure, Urbankova made a minor upward correction to her Russia sales target to USD 119 m for 2006/07, corresponding to a 25% yr/yr rise.
“Reflecting the hefty tempo in Ukraine and other CIS markets, we see the sales growth in Russia/CIS reaching 30% y/y to USD 166.7mn in 2006/07," she said.
Eastern Europe
Egis' Eastern European sales growth in 2005/06 was slightly behind Erste's projections, delivering sales of USD 87.7 m (vs. forecast of USD 90.1 m). Urbankova assumes that Egis' sales in the key Polish market will gradually pick up, and along with the fast advancing Romania, lift the 2006/07 sales tempo to around 15% yr/yr.
New domestic drug subsidy law
Erste continues to assume that other expenses of Egis will be dragged down by the domestic drug subsidy payback. While the earlier draft of the law called for a 14% charge for drugs that carry a fixed subsidy and 16% for drugs which carry a non-fixed subsidy, the newly approved Drug Economy Law unified the rebate to a flat 12% of the subsidy amount, regardless of the drug category.
Consequently, with the corresponding company's guidance for the annual negative impact cut from HUF 2.8 bn to HUF 2.4 bn, Urbankova revised her assumption regarding Egis' drug subsidy payback to HUF 1.77 bn from around HUF 2.17 bn in 2006/07.
New operating profit target
Urbankova set her new operating profit target for 2006/07 to HUF 15,291 m, marginally above the previous value of HUF 14,891 m.
“With the positive impact from the lower rebate to be largely wiped out by higher fees for sales and marketing staff (only partly helped by staff cuts), we see the EBIT margin in 2007/08 at some 15.3%," she added.
New net profit target
Bolstered by solid financial result, but depressed somewhat by solidarity tax (at 4% of the tax base), net profit is expected to reach HUF 15.8bn in 2006/07, the analyst said. Her earlier forecast for net profit was HUF 15,412 m. Urbankova projects a 15.5% yr/yr increase in net profit to HUF 18,256 m for 2007/08.
