• Global values Julphar stock at AED3.86 and recommends a ‘BUY’ on the stock.
Global Investment House – Kuwait -Gulf Pharmaceutical Industries (Julphar -Result update - recorded revenue of AED676.4mn in 2007, up 17.4% from AED576.4mn in 2006. Total revenue in 1H-2008 increased by 14.4% to reach AED308.5mn, up from AED269.8mn in 1H-2007. For 1H-2008, Julphar’s operating profit increased by 11.9% to reach AED57.0mn.
Based on the current market price of AED2.78, Julphar stock is trading at 8.59x of its 2007 earnings and 1.45x of its 2007 book value. On a one year forward basis, the stock is trading at 8.38x of 2008F earnings and 1.30x of 2008F book value. Based on a WACC of 10.0%, the DCF value of Julphar is AED3.91. On a relative valuation basis, the Company’s stock value is AED3.63. Based on the combination of DCF and Relative Valuation method, we recommend a BUY on the stock with a price target of AED3.86, an upside of 38.7% from current levels.
Financial Performance
Julphar recorded revenue of AED676.4mn in 2007, up 17.4% from AED576.4mn in 2006. The revenue included AED541.5mn from the parent company and AED134.9mn from subsidiaries. About 90 per cent of production of Julphar is exported to 47 countries in the MENA region, US, Europe, Africa, Eastern Europe, Russia and Iran.
Gross profit of the Julphar was AED353.9mn for the year 2007, up 10.9% from AED319.2mn for 2006. However the gross profit margin declined to 52.3% during 2007, compared to 55.4% for 2006. The profit declined during the year due to the appreciation of major currencies especially Euro against US Dollar (to which AED is pegged). As Julphar imports most of its raw materials, due to the exchange rate fluctuation and decline in the value of US Dollar, the cost of raw materials has gone up. During the year, the cost of raw materials (which forms around 80% of cost of sales) was up by more than 30%. For 2007, Julphar’s operating profit increased by a 12.1% to reach AED119.1mn. This translated to an operating margin of 17.6% in 2007, down from 18.4% in 2006. The decline in operating margin reflected the decrease in gross margin.
During 2007, Julphar transferred its ownership in Julphar Drug Store (Distribution Division) – UAE and Awafi Drug Store – UAE to newly formed Planet Pharmacies LLC for a consideration of AED150mn and made one-time profit of AED62.5mn. Net profit for the year 2007 was AED207.5mn, almost thrice of 2006 level. The net profit margin for 2007 was significantly up at 30.7%, from 12.0% in 2006. This improvement in net profit is mainly attributed to investment income and one-time income from sale of subsidiaries. It is important to note that the net profit margin improved significantly in 2007 despite a decline in operating margin.
The total asset base of Julphar was AED1,556.1mn at the end of 2007, compared to AED1,176.7mn at the end of 2006. Current assets constitute major share of Company’s asset base. Its share in the total assets was 65.2% for 2007. Account and other receivables as on 31st December, 2007 was AED399.1mn. For the year 2007, the average receivable period was 192 days, down from 218 days in 2006. Similarly the average inventory holding period was 215 days in 2007, down from 238 days in 2006.
Total revenue in 1H-2008 increased by 14.4% to reach AED308.5mn, up from AED269.8mn in 1H-2007. During the period, Julphar transferred its ownership in entities like Julphar Drug Store (Pharmacies Division) – UAE, Scientific Pharmacy – Oman and Fujairah Medical Trading Company – UAE to Planet Pharmacies LLC. So revenue for the period excluded all pharmacy and trading related revenues. Gross profit of Julphar was AED180.9mn for the period 1H-2008, up 14.5% from AED158.1mn for 1H-2007. The gross profit margin was almost constant as previous period at 58.6%.
For 1H-2008, Julphar’s operating profit increased by 11.9% to reach AED57.0mn. This translated to an operating margin of 18.5% in 1H-2008, down from 18.9% in 1H-2007. On account of sale of its subsidiaries to Planet Pharmacies LLC, Julphar made a one-time profit of AED57.6mn during the period. Net profit for the period was AED122.2mn, up 96.1% from 1H-2007. The net profit margin for 1H-2008 was 39.6%, up from 23.1% in 1H-2007.
The healthcare and pharmaceutical sector in GCC countries have been growing at a healthy rate over the past few years. This is due to factors like increase in population, rising purchasing power on the back of record oil revenues, the expansion of the private healthcare sector and increase in healthcare insurance. The private healthcare sector has been expanding in recent years in the region as some of the Governments no longer provide free medical assistance to expatriates. Linked to private-sector healthcare growth is the steady increase in lifestyle-related diseases (more commonly reported in Western countries) which will increase demand for high-value treatments for diseases such as cancer and heart disease. The region is also witnessing one of the fastest growing populations in the World, and this will drive market value upwards in the long term.
All these factors are also expected to drive pharmaceutical market in coming years. Julphar is well-positioned to take benefit of the situation being one of the largest regional players in pharmaceutical sector. The Company has charted out its growth plan to meet the growing demand and has been investing in new plants. In the first half of 2008, Julphar commissioned two plants in UAE and there are a few more plants are under construction which will be completed in the next three years. With the completion of these projects, Julphar will have 14 plants in the UAE.
The Company is also planning to set up another seven manufacturing plants outside the UAE. These plants will be located in countries like Afghanistan, India, Morocco, Sudan, Lebanon, Yemen and Iran. The expansion plan of Julphar will be supported by their local agents in respective countries who will become business partners in these projects. However in order to be successful in new markets, the Company has to adapt different strategies as they are quite different markets as compared to UAE or GCC markets. In fact most of the countries where Julphar plans to expand are quite price-conscious unlike UAE or GCC markets. The Company also has to contend with increased competition on its home turf as more and more foreign companies are looking forward to strengthen their presence here looking at the attractiveness of the market.
