Egyptian International Pharmaceutical Industries Company (EIPICO) reported solid set of results in 4Q16, showing EBITDA growth of 44% Y-o-Y reaching EGP225mn, broadly in line (-6%) with our estimate. This growth mainly reflects: i) price increase (in May 2016) impact on local revenue; ii) export revenue translation post EGP float iii) inventory stock, better revenue mix and export revenue that mitigated the impact of EGP depreciation on margins. Net earnings grew a slower 26% as the company booked FX loss of EGP22mn (likely on receivables as the company has no debt) and booked provisions of EGP29mn (versus EGP6mn in 4Q15; we believe partly to hide some profits).  

Revenue growth: i) Local Sales (+15%, 76% of revenue): Boosted largely by May 2016 price increase for local medicines selling for less than EGP30 (+20% on the retail price - covered 95% of EIPICO’s medicines). However, local revenue dropped 7% Q-o-Q, suggesting lower sales volume; we believe this is likely due to a scale-down of production of some low-margin/loss-making products following the EGP float.

ii) Export Sales (+68%): The boost in export revenue should be fully attributable to the translation of exports. However, in USD terms exports likely continued its slowing down trend that started in 4Q15; which management had clarified it reflects a weakening in exports to Russia and Saudi Arabia.

Margin improvement boosted by price increase, better mix, EGP floatation impact on exports, and lower SG&A: margins were generally higher Y-o-Y; gross profit +1.2 PP, EBITDA +6 PP.

January price increase to defend margins post EGP-weakening in 2017: The government had announced a price increase in January for drugs that were produced after 12 January 2017. According to the  management, medicines selling below EGP50 should witness a 50% ex-factory price increase;  these products contribute by c70%-80% to local revenue. The impact is supposed to start reflecting on the company’s performance starting 2Q17 and will be fully visible in 3Q17; after selling its inventory of finished goods that was produced before 12 January 2017. 1Q17 is likely to reflect high sales volume Q-o-Q: management had indicated previously that sales volumes are growing strongly post January 2017 price increase announcement as consumers are over-stocking before the new higher-priced products hit the market.

Dividends flat despite growing earnings and FCF: The BoD proposed a DPS of EGP3.5 (3.3% yield), disappointingly same as last year despite blossoming earnings and FCF growth, flat CAPEX Y-o-Y (with no announcement of new projects), and 55% increase the net cash balance to EGP576mn end-2016. The implied DPO of 63% in FY16 is significantly below company’s normal levels; ranging 78-84% in the last five years.

EIPICO: EGP105.92 as of 27 Mar. 2017, Rating: Buy, TP: EGP105.00/share, MCap: USD464mn, PHAR EY/PHAR.CA