November 15, 2018/Cordros Report
We initiate investment note on MAYBAKER with a BUY rating at NGN4.43/s TP. The company is in the process of raising capital through Rights – its first foray into the equity capital market in 12 years – to fund expansion project and partly deleverage balance sheet. Issued shares will double to 1.96bn post the Rights in 2019, but beyond that, we have a medium-to-long term positive view of the company. Following the recent divestment from the loss-making Food business, going forward, we will see MAYBAKER commit resources to driving growth in its core business of drug manufacturing that has delivered solid growth over the years (we estimate 12% and 14% 5-year revenue and EBITDA CAGRs respectively). We believe the company will be able to sustain double digit EBITDA growth at 16% CAGR over the next five years, supported by its good market positioning, strong demand outlook for drugs in Nigeria, positive products price outlook, and more efficient processes following divestment from non-core operation.
Good market positioning, government support, healthy demand outlook
The Nigerian pharma market is forecast by McKinsey & Company to grow 9% per annum over the next ten years on growing manufacturing to meet burgeoning demand. MAYBAKER is well-positioned to tap into this growth outlook. The company is a major player in the local drug manufacturing market with 4% market share, supported by a large portfolio comprising 85 SKUs. Volume will be supported by the planned deployment of 22% of the proceed of the capital raise to expanding capacity of paracetamol, currently accounting for 25-30% of Pharmaceuticals revenues, with strong demand potential. Management is also set to increase MAYBAKER’s contribution in the biovaccine production joint venture (JV) with the Nigerian government following the Rights. Management believes this J.V provides significant opportunity to boost revenues in the medium term, stemming from high demand for vaccination in Nigeria with the country’s high birth rate. Management said it will cover for the divestment from Food business (accounting for about 23% average of total sales) by pushing pharmaceutical products strongly into the market, including supporting marketing/promotion activities with 20% of the capital raised from the ongoing Rights. We should mention that the flat 9M-18 revenue vs. 9M-17, despite the divestment, is instructive.
Divestment to spur gross margin and EBITDA
Following the recent divestment from non-core operation, MAYBAKER will from 2019e, focus on the core business of drug manufacturing which has delivered solid performance over the years (12% and 14% 5-year revenue and EBITDA CAGRs). Asides from delivering most of MAYBAKER’s volume (85% as at 2017FY), Pharmaceuticals gross margin is higher at 43% average over the last ten years, 8ppt higher than the combined gross margin. From 34% in 2017FY, we forecast gross margin to recover to 39% in 2019e, and average 40% over 2019-2021e. Management also said it expects to achieve reduction of inefficiencies following the divestment from Food. Combined with healthy revenue outlook, we estimate MAYBAKER will achieve 16% EBITDA CAGR and 22% average EBITDA margin over 2019-2023e.
Both the Rights issue and current market prices are at significant discount to MAYBAKER’s potential
At our TP of NGN4.43/s, the expected total return on MAYBAKER’s stock is 100% on current market price, and 89% on the Rights price. We rate the stock a BUY. On our estimates, the stock is trading at 2019e EV/EBITDA and PE multiples of 2.4x and 5.2x respectively, which compares with 8.5x and 12.2x and 48.4x and 35.4x respectively for MEA and EM Asia peers.
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