Dar Al Dawa Development and Investment Company /Jordan - Pharmaceutical

Global Investment House- Kuwait- Global Investment House – Kuwait –  Dar Al Dawa – Results Update Report- Dar Al Dawa’s total revenue was JD34.1mn in the year 2007, up 17.6% over the JD29.0mn recorded in 2006. The company reported a gross profit of JD15.3mn in 2007, down by 0.6% from the JD15.4mn recorded in 2006.
For arriving at the fair value of Dar Al Dawa, we have used two valuation methods: the cash flow approach represented by the Discounted Cash Flow (DCF) method and the market approach represented by Peer Group valuation.
Based on its current market price of JD4.7, Dar Al Dawa stock is trading at 26.1x of its 2007 earnings and 2.0x its 2007 book value. On a one year forward basis, the stock is trading at 22.4x of 2008 forecasted  earnings and 2.0x of 2008 forecasted book value. Based on a WACC of 11.9%, the DCF value of Dar Al Dawa is JD3.6.
On the basis of the weighted average P/E for the industry and Dar Al Dawa’s projected 2008 earnings, the company’s stock value is JD4.8. Assigning an 80% weight to the DCF value, and a 20% to the relative value, the weighted average share value of Dar Al Dawa came out to be JD3.9, which is 18.4% less than the current trading price of JD4.7. Hence we recommend a “Reduce” on the company’s stock.
Financial Performance
The company’s total revenue was JD34.1mn in the year 2007, up 17.6% over the JD29.0mn recorded in 2006. Cost of goods sold for the year 2007 were JD18.8mn, up by 38.2% from the JD13.6mn reported in the previous year. The company reported a gross profit of JD15.3mn in 2007, down by 0.6% from the JD15.4mn recorded in 2006. This resulted in a decline in the gross profit margin to reach 44.8% in 2007 vis-à-vis 53.1% in 2006. It is worth mentioning that the company imports some of the materials used in production from Europe. And the fact that the Jordanian Dinar is pegged to the U.S. dollar, which has been declining against the Euro, has impacted the gross profit margin of the company. 
Net profit for the year 2007 was JD3.5mn, down by 51.8% from the JD7.3mn reported in 2006. The net profit margin declined to 10.3% in 2007, down from 25.2% in 2006. The drop in the net profit margin was in-line with the drop in the gross profit margin. The other factors which impacted the net margin included increase in the provision for doubtful loans, increase in provision for commissions due to Algeria\'s customers and increase in the amount of expired recalled goods from the markets during the year 2007.
The company’s balance sheet size grew by 2.0% in 2007 to reach JD64.0mn from JD62.8mn in 2006. Accounts receivables, which constituted 39.5% of total assets in 2007, decreased by 2.6% to reach JD25.3mn in 2007 from JD26.0mn in 2006. On the liabilities side, the accounts payable totaled JD5.8mn in 2007, up by 90.1% over the JD3.1mn reported in the previous year. Total liabilities decreased by 19.9% in 2007 to reach JD11.7mn vis-à-vis JD14.7mn reported in the previous year. Total shareholder’s equity increased to JD52.0mn in 2007, up by 8.2% from the JD48.1mn reported in the previous year. ROAE decreased to 7.0% in 2007 from 15.7% in 2006. 
The performance of the company has declined in 1Q2008 compared to corresponding period in the previous year. The sales of the company in 1Q2008 have decreased to JD8.4mn, down by 2.7% from 1Q2007. The gross profit margin for 1Q2008 was 50.1% in comparison to 58.3% for 1Q2007. The net profit margin of the company decreased to 18.4% in 1Q2008 vis-à-vis 28.6% in 1Q2007. The EPS for the period was down by 37.4%. The balance sheet size grew by 6.5% in 1Q2008 to reach JD68.2mn from the JD64.0mn reported at the end of 2007.
The company is well-positioned in its domestic market and has a significant presence in other regional MENA markets. In 2007, Dar Al Dawa had already started exporting to Denmark, Sweden, Germany and Holland and plans to pursue its geographic expansion by entering more countries in Europe. However, we believe that the company has not been able to perform as per its potential. This has been reflected in the modest growth achieved by the company in the past few years.
The company continues its focus on R&D to bring new molecules to the market. The R&D department has already submitted complete registration for 22 products to be registered in 2008-2009. We believe that this will be the growth driver for future years.