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Richter: stellar export performance, one-offs boost 1Q06 results

5.5.2006 9:54
Autor: KBC/Patria

Richter reported HUF 14.0bn net profit for 1Q06, almost 30% ahead of consensus estimate. The figure also beat our forecast, the most optimistic on the market. The stellar performance, however, was partly due to one off items, such as change in invoicing procedures in Russia, wholesalers stockpiling of drugs qualified to the DLO system and a surge in API deliveries. Financials also helped the results more than expected.

Domestic sales in 1Q06 (HUF 8.6bn. down 7.3% y/y) came only slightly below our expectation. As expected, wholesalers' stockpiling in 4Q05 had a negative impact on sales in Hungary in 1Q06. As a result, Richter's domestic market share in 1Q06 fell back to 7.2% from 7.6% in 2005.

Export sales came almost 20% higher than expected, mainly due to underestimated Russian sales. Richter changed invoicing procedures with its largest buyer in Russia, Protek, which has resulted in some US$ 10 million higher sales. The company sold US$ 10m to the DLO system, in line with our forecast. Sales to other CIS countries showed an impressive 53% growth, with Ukrainian sales delivering an outstanding 58% development.

Other export markets also delivered positive surprises. Both the Czech and Slovak turnover of Richter grew by 50% on a y/y basis, due to the strong performance of oral contraceptives and multiple sclerosis drug, Avonex.

Sales to other markets (mostly API sales) came at US$ 56.6m, much higher than our expectation of US$ 33.5m: This resulted in higher sales figure, but had minor impact on profits.

Due to the weakening forint, quarterly gross margin rose by 135 bps to 61.5%. We expected 64.2% gross margin for the quarter, calculating with much lower API sales. Still, gross profit of HUF 26.9bn beat our estimate of HUF 24.6bn.

However, expenses came also higher than our estimates: the Sales & Marketing-to-sales ratio was 19.7% versus our estimate of 19.4%. R&D costs-to-sales ratio came in line with our forecast, however, since we underestimated sales, this line also came in ahead of our estimate. As a result, headline EBIT came-in at HUF 10.3bn, a mere 1% above our forecast of HUF 10.2bn, but beat market consensus by 13%.

As expected, financials had a bold positive contribution to the bottom line. Richter has earned a net interest of HUF 576m on its government bond portfolio and booked HUF 748m gains on FX hedges. (Richter currently hedges the EUR/USD cross-rate only, while the 2.2% quarterly weakening of the greenback provided a positive result.) Both figures were fairly close to our estimate, with hedges delivering some positive surprise. As expected, Richter also booked substantial HUF 2.3bn gains on the revaluation of trade receivables, thus the financial result added HUF 3.77bn to the bottom line. Since the difference between consensus EBIT and net profit estimate was less than HUF 1.8bn, we have a strong suspicion that the market significantly underestimated Richter's financials in 1Q06.

As a result, net profit came-in at HUF 14.0bn, 0.1% down from the exceptionally strong 4Q 2005, but still showing a 67% improvement y/y. We expect positive market reaction to the figures, however, management's comments on the sustainability of export growth are very important. For now we are keeping our Sell recommendation on the stock with a fair value estimate of HUF 41,193.

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