Zentiva’s 1Q06 net income fell by 13% y/y to CZK 511 mil., which was 10% below the market consensus, which has been unrealistically high, but 7% above our estimate. As expected, Zentiva’s overall performance suffered from the weak domestic market performance and several one off effects following the integration of Sicomed and continued foreign expansion. These factors were offset by the company’s strong performance abroad, which drove the gross profit margin above our expectation to strong 65.3% vs. 63.6% last year even after consolidation of the lower margin Sicomed.
While we do not expect any significant improvement in the 2Q06, we are positive on the 2H06 due to Zentiva’s strong performance in the export markets enhanced by focus on Ukraine, Baltics and Bulgaria and expected record number of new registrations (60 vs last years’ 30). Following the recent sell off, Zentiva now trades at an 15% discount to its regional peers on 2006E EV/EBITDA of 12.3x and 20% on 2007E EV/EBITDA of 9.9x. Finally, Zentiva proposes a dividend of CZK9.5 per share, which is slightly above our estimate of CZK9.0. We reiterate our Buy recommendation.