ANALYST VIEW - KBC upgrades Hungary's Richter to 'Buy', cuts target price

On our 2013F EV/EBITDA of 7.2x, Richter trades at a 36.7% premium to the CEE pharma
median of 5.3x, which we believe is fair given the medium/long-term high margin revenues from innovative
drugs such as cariprazine, Esmya and biosimilars (we do not include the latter in our DCF).

Gergely Pálffy, analyst at KBC in Budapest said in a research note dated 29 Nov that the recent sell-off of Richter triggered by its exclusion from the MSCI EM index as of 1 Dec, “has created a rare buying opportunity, similar to the one last year."

In his view, “the outlook for the firm’s fundamentals has improved thanks to the strategic agreement with the government and the soon-to-be-enacted healthcare bills minimizing healthcare tax expenses."

Pálffy said his more bullish stance is also supported by his calculation of Richter’s generic franchise value, which amounts to cc. HUF 37,000 per share.

“HUF weakness could provide some upside potential to our estimates as we calculated with an average EUR/HUF rate of 284 and RUB/HUF at 7.1 during 2013-2018," he added.

The analyst has reduced the multiple assumptions that shape his terminal value due to lower liquidity expectations after the exclusion from the MSCI EM index (i.e. positive regulatory impact neutralized). He has cut his fair value estimate by 1% to HUF 42,250 per share, which implies 19% upside.

“On our 2013F EV/EBITDA of 7.2x, Richter trades at a 36.7% premium to the CEE pharma median of 5.3x, which we believe is fair given the medium/long-term high margin revenues from innovative drugs such as cariprazine, Esmya and biosimilars (we do not include the latter in our DCF)," the analyst concluded.

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