Richter reported HUF 14.0bn net profit for the fourth quarter versus our forecast of HUF 12.9bn and consensus estimates of HUF 13.2bn. While sales and gross profit lagged slightly behind our estimate, quarterly EBIT came at HUF 12.7bn, or 5% above our forecast, mainly due to strong control over marketing expenses and lower-than-indicated R&D spending. The financial result was HUF 1.4bn profit versus our estimate of HUF 0.8bn, which helped the bottom-line figure more than expected.
Domestic sales in 4Q05 (HUF 11.7bn, up 22% y/y) came well ahead of our expectations. Export sales came lower than our estimates (up 5% y/y to USD 119m) as we had estimated a 13% y/y increase in 4Q05. The growth rate of Russian exports slowed down in the fourth quarter (Russian sales reached USD 31m, up 14% y/y), even though sales to the subsidy system in Russia were in line with our expectation of USD 5m in 4Q05. Other CIS countries (including Ukraine) posted 36% sales growth in the 4Q05 and CEE sales expanded by 9%.
Quarterly gross profit was HUF 22.7bn (up 23% y/y) due to increasing sales and slightly improving gross margin year-on-year.
Expenses came lower than our estimates: the Sales & Marketing-to-sales ratio was only 15% versus our quarterly estimate of 18%. Research & Administrative costs-to-sales ratio also came out low at 7.5% versus our expectation of 11%. Richter did not disclose the amount of one-off upfront revenue it received from Forest Laboratories for two CNS compounds.
Headline EBIT came at HUF 12.7bn, 5% above our forecast due to strong cost control. The financial result was HUF 1.4bn profit versus our estimate of HUF 0.8bn, which helped the bottom-line figure (HUF 14.0bn) more than expected.
Year after year an increasing part of Richter’s profit comes from financials, making the structure of earnings less attractive for us. In FY 2005 financial profit has already reached 17% of EBIT versus 7% in 2004. Thus net profit increased by 18% y/ y in 2005 versus a less attractive 8% growth in EBIT. The unfavourable structure of the results raises serious questions about Richter’s dividend policy and capital structure management.
Moreover, this is not the first time this year that sales growth has arrived below expectations, although Richter has reported less general costs than previously indicated thus enabling itself to compensate for the overheated sales estimates of analysts.
Either way, Richter beat the consensus EBIT estimate by 2.4% and net profit forecast by 3.9%, thus we expect a slight positive market reaction to the figures. However, we would take this as a good opportunity to lower exposure on Richter, which now trades at a 2006 P/E of 18x, well above the historical P/E which is typically no higher than 16x.
We maintain our Sell recommendation on the stock and our target price of HUF 36,266 per share.
Conference call details: 1600 CET/1500 GMT. +36 68 098 1331 (Hungary)/+44 207 138 0827 (UK)/ +1 718 354 1152 (US).