…and a new lease of life
By JULIUS ALAGBE
Amid rising cases of COVID-19, Neimeth Pharmaceutical Plc stock rallied in the few past weeks, though it has also dropped, having gained more than 45% in a week. Due to the ravaging impacts of COVID-19, analysts’ consensus estimates are quite biased in favour of potential earnings growth in the healthcare and pharmaceutical sectors.
Despite this, equity research analysts at WSTC Securities Limited maintained a sell rating on the company’s stock, on account of persistent impairment on receivables. For Neimeth downgrade on relative inconsistency in the top and bottom-line growth was among the downside risk cited by analysts. Of particular importance to the fact behind analysts estimate is the company’s negative retained earnings.
Analysts believe that at the current earnings level, it could take three to four years for Neimeth Plc to be able to clear the deficit and pay a dividend. Equity analysts project a free cash flow of N182.83 million in 2020, which represents a 14% growth from N160.44 million recorded in 2019.
“However, owing to our estimated increase in net debt, we expect free cash flow distributable to equity holders to be negative in 2020”, analysts explained.
In its estimates, WSTC Securities said it expects Neimeth revenues to grow by 5% year on year in 2020. At the same time, the financial service firm forecast the Pharmaceutical company profit after to expand by 13%.
“Our bottom-line growth expectation is anchored on sustained operating efficiency by the Company”, WSTC stated.
Consolidation and Stability
Neimeth consolidated its performance in 2019 as revenue grew by 5% from N2.27 billion in 2018 to N2.37billion in 2019. However, the cost of sales grew faster by 6%, thereby resulting in a 100 basis points decline in gross margins from 51% in 2018 to 50% in 2019. The Pharmaceuticals Company’s operating expense margin improved from 32% in 2018 to 31% in 2019.
Analysts said this underpinned Neimeth’s operating efficiency and effective cost management. Explaining further, analysts stated that a notable development was the 95% decline in impairment losses on trade receivables from N188.82 million in 2018 to N8.85 million in 2019.
“In prior periods, the Neimeth worked a five-year program to minimise its impairment provision on receivables. The performance of the company in 2019 reflected the success achieved in that regard”, analysts at WSTC Securities explained.
As a result of lower expenses and impairment charges during the year, operating profit spiked by 48% from N280.18 million in 2018 to N413.38million in 2019. Its finance cost lowered by 4%, thus resulting in an 82% growth in profit before tax from N167.22 million in 2018 to N304.44 million in 2019. The firm’s profit after tax grew by 48% from N148.77 million in 2018 to N220.15 million in 2019.
WSTC said the profit recorded in 2019 represented the highest figure reported by the Company from as far back as 2012.
In Q1’20, revenue grew by 167% from N227.07 million in Q1’19 to N606.48 million in Q1’20. Cost of sales also grew by 75% from N173.55 million to N303.77 million, however, cost margin declined from 76% in Q1’19 to 50% in Q1’20.
Neimeth Plc recorded a significant decline in operating expense margin from 71% in Q1’19 to 33% in Q1’20. This prompted a 194% increase in operating profit from a loss of N119.44million in Q1’19 to a profit of N111.68 million in Q1’20. Owing to a 45% increase finance cost, Neimeth moved from a loss before tax of N139.30 million in Q1’19 to a profit before tax of N82.65 million in Q1’20.
The momentum slowed down in Q2’20, which reflected in the 25% decline in revenue. Cost margin stood at 52% in Q2’20, from 47% in Q2’19. Therefore, gross margin declined by 900 basis points from 53% in Q2’19 to 45% in Q2’20.
WSTC Securities said while the Company sustained its cost efficiency, which was reflected in the 3% decline in operating expense from N256.69 million in Q2’19 to N249.59 million in Q2’20, the decline in gross margins took its toll on bottom-line.
This happened as operating profit dipped significantly, dropped by 95% from N132.57 million in Q2’19 to N6.38 million in Q2’20. On the back of a 200% increase in finance cost from N12.83million in Q2’19 to N38.44 million in Q2’20, the Company recorded a loss before tax of N32.06million in Q2’20.
In the first half of 2020
Neimeth Plc relatively strong performance in Q1’20 made up for the decline in earnings in Q2’20. Notably, the first two quarters were typically the weakest for the Company, and the majority of its earnings were generally recorded in the second half of the financial year.
The financial year 2014 Performance
2014 was quite challenging for the Pharmaceutical Company. The analysis shows that Neimeth’s revenue declined by 19% from N2.02 billion in 2013 to N1.63 billion.
“At the time, the management attributed the decline to the Company’s inability to import some key machines. “This resulted in a slowdown in production activities during the financial year. Due to slower production activities, the Company recorded a significant decline in most of its top brands such as Pyrantrin and NCP”, analysts at WSTC explained.
Neimeth’s cost of sales declined by 9% from N959.23 million in 2013 to N874.44 million in 2014. However, the cost margin was higher in 2014 at 54% when compared with 48% in 2013. Analysts explained that the slower decline in cost of sales relative to revenue resulted in a 30% decline in gross profit from N1.06 billion in 2013 to N753.96 million in 2014.
The tough business environment had pushed overheads but the management had struggled to curtail operating expenses. In the year, Neimeth’s operating expenses expanded marginally, which rose by 1% from N891.11 million in 2013 to N903.12 million in 2014.
Given that the Company experienced lower revenues amid rising operating expenses, operating profit declined to negative territory. An operating loss of N113.71 million was recorded in 2014 compared to an operating profit of N237.76 million in 2013.
Analysts at WSTC stated that a higher finance cost incurred in the year further put pressure on bottom-line. Looking at how the Company finances its operation, it was discovered that finance cost grew by 52% from N55.63 million in 2013 to N84.44 million. Explaining the trend, WSTC Securities stated that the higher finance cost reflected a higher debt level in 2014.
“We note that the Company had to take on additional debt (short-term) to fix its working capital shortages. Cash levels were strained due to a 131% spike in the acquisition of capital, work in progress as related to capital expenditure”, analysts explained.
In 2014, the year of its challenges, Neimeth reported a loss before tax of N198.14 million as against profit before tax of N182.14 million in 2013. Then, loss after tax stood at N228.51 million compared to a profit after tax of N130.58 million.
Equity research analysts at WSTC said: “The relatively poor performance in 2014 was majorly due to lower production levels by the Company”.
The Reform and Strategy for Growth
After the challenges witnessed in 2014, then came 2015 which analysts tagged as the year of reform and strategy for growth. Specifically, WSTC explained that in 2015, there was a change of strategy, as agreed by the Board and management team. Analysts recognised that in prior periods, the Company consistently faced the need to make provisions for impairment on trade and other receivables.
This was due to the previous strategy of the Company to boost sales through increased credit facilities to distributors. However, the approach had put the Company in a less advantaged position, as it had to make provisions for impairment consistently.
Analysts said: “For instance, in 2013, provision of impairment stood at N154.69 million, which was a significant portion of Neimeth’s profit before tax of N182.14 million during the period. In 2014, provisions for impairment stood at N153.52 million; meanwhile, loss before tax stood at N198.14 million”.
In line with the Company’s new approach to cash generation, it had to make a significant provision for impairment of N289.54 million in 2015. Expectedly, revenue dipped by 10% from N1.63 billion in 2014 to N1.46 billion in 2015. On a positive note, the cost margin lowered by 100 basis points from 54% in 2014 to 53% in 2015.
Neimeth was efficient on its operating expense lines, as operating expense margin lowered from 46% in 2014 to 42% in 2015. However, the significant impairment it took on trade receivables weighed heavily on bottom-line, as it suffered another loss after tax of N335.61 million.
Shift to Prosperity
Analysts recalled that during the financial year, the Company proposed a three-pronged approach to long term profitability and sustainability in the marketplace. WSTC Securities said the approaches were to undertake a surgical overhaul of the corporate structure of the Company to focus on meaningful and sustainable growth.
“In lieu of this approach, Neimeth poached a new Chief Executive Officer, Dr Mrs Ebere Igboko-Ekpunobi – a pharmacist by education and practice with experience across the United States and China.
“The appointment of Mrs Igboko-Ekpunobi came after the retirement of the then CEO, Mr Emma Ekunno who had reached the retirement age after 35 years in service for Neimeth.
“The appointment of Mrs Igboko-Ekpunobi was expected to be the game-changer as she was entrusted with the responsibility to lead the reconstruction of the Company”, analysts explained.
Also, Neimeth new strategy was for the new helmsmen to consolidate the Company’s local research and product development. In the process, the Board strengthened the oversight function of the R&D by setting up a special strategy committee headed by Prof. Maurice Iwu, a Professor of Pharmacognosy.
It then realigned its market participation strategy to de-emphasise widespread retailing which had always resulted in corrosion of asset quality and cash flow. This strategy gave rise to the provisioning of the N289.54 million weak recoverable that resulted in the loss-making position of the Company in 2015.
“It performance in 2015 was due to the significant provisioning done by the Company in a bid to realign its strategy”, analysts stated.
Reforms Yield Results
The strategies adopted by the Company in the previous year factored in the appointment of a new CEO appeared to yield results in 2016, analysts stated. In the year, Neimeth’s revenue rose significantly by 37% from N1.46 billion in 2015 to N2 billion. The strong topline growth was attributed to an improvement in distribution and sales force.
Earlier in the previous year, the focus of the Company changed as cash generation became the new focus. Consequently, Neimeth strengthened its working relationship with its major distributor Worldwide Commercial Ventures Limited for 80% of its portfolio.
WSTC said according to information provided by the Company, efforts were put in place to focus only on distributors who had cash to buy products. Also, the management revitalised its field force and measures were taken to recruit and retain sales representatives during the period.
Analysts stated that the restructuring efforts extended to its operating expense line which dropped by 6% from N899.31 million in 2015 to N849.69 million in 2016. In the period, Neimeth recorded a 45% decline in impairment losses on trade receivables, thus underpinning its efforts towards cash generation.
The strategy yielded results as cash generation significantly improved, net operating cash flow grew by 97% from N243.95 million in 2015 to N481.72 million. Overall, profit after tax improved from a loss position of N335.61 million in 2015 to a profit of N65.09 million in 2016.
WSTC Securities said as a reward for the patience of shareholders, a bonus issue of 1 for 10 was declared for distribution. The Company’s negative retained earnings position, resulting from accumulated losses in the past, made it unable to pay dividends to shareholders.
Riding Through storm
A major fire incident cut short the Company’s path to long-term earnings growth. On March 7, 2020, a fire incident occurred at the Company’s production plant at Oregun. In a separate development, Neimeth’s Chief Executive Officer was involved in a sporting accident and had to be hospitalised for an extended period, which later resulted in her resignation.
Then, Chief Financial Officer (CFO) took charge as the Acting Managing Director.
Analysts explained that the double-whammy of the fire outbreak, coupled with a weak policy implementation – owing to the absence of the CEO who was appointed majorly based on the Company’s renewed strategy drive – took its toll on the Company’s performance during the financial year.
Specifically, analysts stated that revenue nosedived by 23% from N2 billion in 2016 to N1.54 billion in 2017. Also, Neimeth’s cost of sales declined by 22%, amid a significant loss in raw materials to the fire outbreak.
Notably, an inventory write-off (after insurance income from the insurer) of N322.97 million was recorded during the year. The significant inventory write-off drove the Company to a loss-making position in 2017.
Overall, the Company reported a loss after tax of N403.92 million during the year, largely driven by events related to the fire outbreak, particularly the inventory write-off of N322.97 million.
Neimeth survived its ordeals and challenges and reported a strong rebound in 2018. The pharmaceutical Company’s revenue grew by 44% from N1.54 billion in 2017 to N2.27 billion in 2018. Due to the medical challenges faced by its erstwhile CEO, the strategy implementation that was in place had to halt and restart.
However, Neimeth completed the process of hiring a new CEO which later took over in 2019. In the period, cost of sales increased by 83%, owing to the scarcity of foreign exchange. It was noted that the cost of raw materials, which contributed an average of 60% to the total cost of sales, grew by 58% from N618.90 million to N974.68 million.
Notwithstanding Neimeth’s gross profit increased by 25% from N930.33million to N1.16 billion. However, gross margin dipped from 61% in 2017 to 52% in 2018. Management effectiveness and efficiency bear on the performance in 2018 as operating expenses declined by 7% from N972.95 million to N904.05 million.
WSTC said: “The decline in operating expenses majorly resulted from the strategic decision made by the Company’s Board to relocate the entire personnel of the Company from its property at Ikeja to the manufacturing premises at Oregun”.
According to the Board, the move was intended to ensure enhanced supervision and control of the manufacturing processes. As a result of the decision, the Company saved about N109 million in overhead costs in the period.
Analysts stated that the efforts of the management to reduce the provisioning of impairment on trade receivables continued to yield result, reflected in the 14% decline in impairment charge from N220 million in 2017 to N188.82 million in 2018.
A significant step undertaken by Neimeth during the financial year was the renovation of its factory, and the opportunity taken to upgrade facilities to modern standards. Overall, profit after tax stood at N148.77 million in 2018, from a loss after tax of N410.48 million in 2017. A bonus issue of 1 for 10 was recommended to shareholders for the financial period.
Equity research analysts at WSTC stated that based on the firm’s assessment, it noted the improvements in the results of Neimeth. WSTC Securities explained in the analysts note that it identified the current performance of the Company, particularly in the last two years were manifestations of the strategies and policies put in place since as far back as 2015.
“Based on available information, we believe that the Company is on track to sustain its performance. “The underlying problem of the Company, in our view, had been the persistent impairment of receivables”, WSTC Securities explained.