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Patria starts Zentiva as "buy", with target price 663 CZK

20.8.2004 11:43
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Zentiva is a pure generic drug producer offering both healthy growth potential and the prospect of attractive dividend yields. Traditionally active mainly on the Czech and Slovak markets, it now has ambitions to penetrate other CE countries. We are initiating our coverage of the stock with a buy recommendation and target price of CZK 663 per share.

* Zentiva is the largest producer of generics in the Czech and Slovak Republics, where it benefits from long-standing links with physicians, pharmacists and local authorities and good brand recognition among consumers. These help to defend a high domestic market share under threat from both international originators and regional generic peers. Zentiva has recently begun penetrating Polish and Russian markets, which has helped to change its profile from a restructuring to a growth story. We expect sales to rise by 9% annually over 2004-08 and net profit to double by 2007.

* The recent capital increase will allow the company to repay its outstanding debt by 2005. As a result, almost unlevered Zentiva, with a low capex/sales ratio thanks to free production capacity and high operating efficiency, will generate substantial free cash flow to be either distributed among shareholders or used for acquisitions in the medium and long term. Return on equity should stabilize above 20% and remain among the highest compared to regional peers.

* The stock is currently trading at a 17% discount to our fair value estimate of CZK 663 per share. Unlike the current market multiples, which may seem uninspiring, the discounted cash flow reveals Zentiva’s expected strong organic growth and moderate capex in the medium term.

* Zentiva lacks a product niche where it considerably outperforms regional peers in terms of quality, product range and/or name recognition. Should the company decide to enter Western markets in the more distant future, we believe a partnership or acquisitions are more likely than an export-based expansion.

Jan Hájek, Patria Finance


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