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Egis: 4Q 2011/12 results – missed badly on all profit lines (negative)

Egis: 4Q 2011/12 results – missed badly on all profit lines (negative)

15.11.2012 15:14

Egis published its quarterly results, yesterday after the Hungarian market close. Egis reported a disappointing net profit of only HUF 1.6bn (-20%
y/y) or an EPS of HUF 210, 48.9% below consensus of HUF 3.2bn (portfolio.hu collection of 7 estimates) and 39.9% below our estimate of HUF.7bn. Quarterly EBIT of HUF 2.1bn (+4.0% y/y) came in 32.5% below of consensus of HUF 3.1bn, due to higher sales and marketing and R&D expenses and lower-than-expected gross margin of 51.2%. Therefore, FY 2011/12 EBIT reached HUF 20.4bn (+20.4% y/y on headline level, though helped by a low base as last year was punished by one-offs of roughly HUF 3.3bn, implying a clean y/y growth of roughly 9%). Top line reached HUF 34.3bn (+3.6% y/y), slightly above consensus of HUF 34.2bn, due to higher than guided API sales growth of. FY 2011/12 revenue of HUF 132.8bn met exactly the lower end of 3.0%-5.0% revenue growth guidance.

(=) CIS up only modestly (+5.4% y/y): Quarterly CIS sales came in roughly in line with our expectations and for full fiscal year CIS sales were up 7.4% y/y, meeting the 6-8% growth guidance. Russia was up 6.6% y/y in the quarter (in € terms), but up only 3% in RUB terms, due to adverse impact from suppliers’ inventory reduction and price caps on vital and essential drugs, which make up almost 2/3rd of Egis’ Russian sales. For FY 2011/12, Russian sales was up 5.3% y/y in € terms (4% y/y in RUB terms), meeting the 5.0-7.0% guidance. Quarterly Ukrainian sales were down 14.5% y/y, due to pre-deliveries of € 0.5m in previous quarter and change in seasonal sales of a product (€ 1.5m impact).

(=) CEE down 7.1% y/y: CEE sales came in line with our expectations, implying that full year CEE sales were down 9.4% y/y (negative impact by weaker CEE currencies vs. the € was 4%), coming in better than the -10 to -15% guided in August. Polish sales managed to increase second time on a q/q basis, but they were still down 13.5% y/y, due to adverse price and reimbursement changes since autumn of 2011. For the full year, Polish sales were down 17.8% y/y in € terms and down by 13% in PLN terms. Other CEE sales were down 1.1% y/y in the quarter, and down 1.4% y/y for the full year.

(-) Lowest gross margin since FY 2007/08 due to high API in the sales mix: The weakness in 4th quarter gross margin surprised us, even though we penciled in below consensus margins. It came in extremely low at 51.2%, much weaker than consensus (55.1%) and our (53.8%) gross margin estimates and below the 52.8% a year ago (we note that management erroneously expected 3months ago that it would be better on y/y basis). The chief reason is the higher than expected API sales of €15.4m (up 46.7% y/y), which together with the other low margin finished pharmaceuticals (up 22.4% made up 22.7% of export sales, versus our 21.9% estimate, let alone the 17.3% a year ago. The price erosion in Hungary also contributed to the low gross margin.

(-) Operating costs pressured EBIT: Total operating expenses of HUF 15.4bn were 2.4% above our estimate of HUF 15.1bn. Sale and marketing expenses came in at HUF 9.0bn or 26.2%(!) of revenues (+8.1% y/y), 5.1% above our estimate (the company gave no explanation for such a rise in the quarterly figure, though we suspect it was due to higher costs in Russia). R&D reached a historic high HUF 3.9bn or 11.3% of revenues (+28% y/y) 9.4% above our estimate, due to higher material costs experimental developments and costs of tests. Admin expense of HUF 2.5bn (-20.8%) implies some costs cutting, as it came in 13.0% below our estimate.

Our view:
Egis’ FY 2011/12 EPS of HUF 2,380 came in 10.7% below FY 2012 Bloomberg consensus of HUF 2,666. As we have flagged it in our preview last week, we were expecting below consensus numbers, however this quarterly result should not be taken as the beginning of a structural weakness in Egis even if it was below our estimate. While we expect some sell-off today, we would soon accumulate the stock from a longer term perspective, due to our expectations that Egis could also benefit from the continued deductibility of the 20% subsidy tax and the medrep fee, which could lower its annual operating expenses by HUF 4bn per year (our model assumes no such savings from FY 2013/14).

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