! ! ! C ! 0.00 500.00 1000.00 1500.00 2000.00 2500.00 3000.00 3500.00 4000.00 4500.00 5000.00 Disclaimer This material is used or consid taken as limitawriting and sub as such. Minddocument is nbound by the fCurrent P 52 Week Expected Target Re FY 2010E FY 2010E Key FinanRevenue Operating Net Incom Total AsseTotal DebProfitabiliGross Prof EBIT margNet Profit Sales Grow Net Profit Total AsseRisk Indica Debt to Ca Interest CBeta (5 YeReturn Ind DPS Dividend Y ROE ROA 5 Years Av Price Mult P/E P/B FCFF (in M EBIT (‐)Taxes NOPAT (+)Depreci (‐)Purchas(‐)Investm Associates (Increase)Free Cash Reve Net I Net P Net P Beta P/E (P/B Current M0 0 0 0 0 0 0 0 0 0 0 01‐Jan‐09 01‐Mar‐09 01‐May‐09 01‐Jul‐09 Vs produced by Mind dered as an offer to tions of the maxim bject to change. Wspring and its empot to be relied upon oregoing limitations Price Price Range Dividend Yield eturn EPS NAV cials (in mn) Profit e t t ty & Growth fit Margin in Margin wth (YoY) Growth t Growth ators apital overage ars Average) dicators Yield verage Return iples n) ation e of Assets ent in s/Securities /Decrease in NWC Flow to Firm nue (mn) ncome (mn) Profit Margin Profit Growth (YoYat Current Price) (at Current Price) arket Pric 01‐Sep‐09 01‐Nov‐09 01‐Jan‐10 01‐Mar‐10 01 May 10 olume (RHS) dspring Research (o sell or a solicitatium possible loss o hile the information loyees accept no ln or used in substits. Tk. 3315.15 Tk. 2629 ‐ 43 0.91% 17.75% Tk. 176.44 Tk. 810.36 2006‐07 8,747.70 1,916.50 1,458.20 12,539.00 3232.3 2006‐07 38.27% 21.91% 16.67% 20.56% 7.65% 14.57% 2006‐07 28.08% 6.85 0.94 2006‐07 50, 50% B 2.04% 18.85% 12.42% 36.07% 2006‐07 10.01 1.76 2006‐07 2081.14 515.08 1566.06 714.71 1119.87 1090.00 770.32 ‐699.42 Q3 20 1194 26622.2 ) 33.3 0.193.Squ a ce: Tk. 331 4335.75 01‐May‐10 01‐Jul‐10 01‐Sep‐10 01‐Nov‐10 01‐Jan‐11 Closing Price (LHS“Mindspring”), an in on of an offer to bu or gain. Past perfor n has been obtaineiability for any direution for the exerciCOMPANY 5 Paid‐up Ca 362 Reserve & Market Ca Total No. 4 Free Float 6 Sponsors 2007‐08 2008 10,553.80 11,82 2,248.70 2,92 1,525.60 2,05 15,058.20 14,90 4398.1 292 2007‐08 2008 37.98% 40.7 21.31% 24.7 14.46% 17.4 20.65% 12.0 4.62% 34.9 20.09% ‐1.0 2007‐08 2008 31.63% 21.1 5.85 7.1.01 0.2007‐08 2008 40, 35% B 40, 2 0.97% 1.3 17.15% 20.1 11.06% 13.7 55.36% 38.2 2007‐08 2008 24.09 17. 3.87 3.2007‐08 2008 2594.19 3338 642.06 826 1952.13 2511 738.96 827 1765.94 1541 503.16 500 666.88 ‐586 ‐244.89 1884 10‐11 2 44.15 1 0.74 28% 33% 54 .09 78 a re Ph a 15.15 0.00 50000.00 100000.00 150000.00 200000.00 250000.00 300000.00 01‐Mar‐11 ) ndependent researuy any securities, mance is not indicd from sources bel ct or consequentiase of independent privat Y AND MARKET apital & Surplus apitalization of Securities (estimated) Control 8‐09 2009‐10 26.20 12970.99.00 3,325.90 8.40 2497.1 04.60 16,405.829.2 2735.4 8‐09 2009‐10 70% 43.32% 77% 25.64% 41% 19.25% 06% 9.68% 92% 21.31% 02% 35.30% 8‐09 2009‐10 14% 16.32% 34 11.19 92 0.63 8‐09 2009‐10 5% B 35, 30% 6% 0.98% 15% 20.93% 74% 15.95% 23% 32.90% 8‐09 2009‐10 .22 21.64 24 4.18 8‐09 2009‐10 8.08 3583.63 6.17 886.95 1.90 2696.68 7.40 883.66 1.53 1535.05 0.00 40.00 6.64 395.06 4.42 1610.24 2010‐11E 14786.85 2862.30 21.87% 38.61% ‐ 18.37 4.00 a rmace ch firm registered w or to enter into any ative of future resu ieved to be reliable l loss arising from judgment. It is bein e CirculSNAPSHOT Tk. 1962.0 m Tk. 8943.01 Tk. 70,019.4 19.62 mn 8.99 mn 54.17% 0 2 0 0 0 0 0 B 0 0 8 4 • We SQP proagro • Hug reawith US, and UK cou • Esta cou rem • Stro yearesp 13.3 • Val1 2 3 • Low mar • Pospatmul proseco som • Reg the • Prohug a siutical M with Registrar of Joy other agreement. lts. The information e, Mindspring do no the use of this doc ng furnished to you ation mn Face Va mn Market mn Fiscal Y Sector Catego Listing are covering SPH), the large duction of form o vet product, fa ge Market: Th ch TK 100 bn b hin 2012 and th UK and other provide contraand has exclusi ntries and USA ablished Industpled with syne mains the most e ong financial p rs, as its CAGR o pectively. 5 year 35% respectively ue Drivers: We e 1. Upcoming ca end of 2012 of company; Volume Par Anticancer D 2. Producing a injectables a3. Amplification expense and Square Textiw Risk: It is a low rket. t TRIPS Market ent molecules, tinational comp duction of APIond‐line ARVs) me reduced dem gulatory Risk: Th authority lists sblem coordinat e portfolio of as gnificant challen Limite S Value: T int Stock Companie Projections of potn and any views ex ot represent that it cument or its conte solely for your info alue T t Lot Year End Phar ry Year quare Pharmacconglomerate, ulated drugs, ac abrics and textile e Bangladesh p by 2013. The ex he cost cutting European count ct‐manufacturin ve export posit is not far away. ry Position: Wit rgic gains, espfficient player w erformance: SP of revenue and r average ROE a y. expect company apacity expansio to meet the loc Facilities to be renteral (LVP) rugs; and and marketing nd so on for bot n in bottom‐line the immense g le and Square Hw risk company R t Share: As the it may stand panies by 2016 s and selected from MNCs wil and in the futur he cost controlli ome of the drug ion and lack of sset. Coordinatio nge as the comp d TK. 3855.0 es and Firms, Bang ential risk or return xpressed in this do is accurate or com nts or otherwise aormation, and by ac Equi8 Tk. 100 1 March maceutical A 1995 eutical Ltd. (DS which has bu ctive pharmaceu e to hospital anpharmaceutical xpiration of pathealth policy in tries will create ng services for M tion in LDC cou th significant pecially in raw with 20% of marPL performed s net profit accru nd ROA are end y’s future growtns in productiocal and export d build: (a) Solid and (c) Spec of insulin, H th local and fore e will be credite rowth in associospital). with very little ISKS company will to lose the so . In addition, t finished drugs l increase price re. ng will be emings as essential dstrategic focus on and strategic any adds more C Q Q Q Q 00 gladesh. This docuare illustrative, an cument are given plete and it should rising in connection ccepting this report ty Resea 8 th May 2011 E: SQURPHARM usinesses range utical ingredientd real estate. market is expe ent of expensiv n regulated mar opportunity to MNCs. SPL has ntries. Other Eu resence in key material, the cket share. strongly for the ued 15.63% and dowed with 19.4 h will be driven n facilities (3rd U emand of the p Doses Form, (ial products s HFA MDIs, neb ign market. ed by reduced f ates’ income (es co‐movement w not be able to ome of the ma echnology tran s (like newly p es of drugs, ma ent from govern rugs. : The Company c focus may proassets. CONSOLIDATED Q EPS (Resta 2010‐11 Q1 46.22 Q2 92,28 Q3 135.63 Q4 YTD ment is not to be nd should not be as at the date of not be relied on n therewith. This you agree to be rch MA, CSE: es from s (APIs), ected to ve drugs rket like o export entered uropean markets ompany e last 5 16.52% 47% and by: Unit) by products b) Large such as bulizers, financial specially with the sell on‐ arket to sfer for atented y cause nment if owns a ve to be QUARTERLY ated) 2009‐10 34.15 70.9 101.72 127.29
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Recent Performance • A rise of 16.06% in the standalone net sales for the 3rd quarter
ended December 2010 on a Year‐over‐Year basis. Net sales are increased to Tk. 9.97 billion from Tk. 8.59 billion in the same period of previous year. During the period, the company disclosed a standalone profit of Tk. 2.18 billion as against profit of Tk. 1.75 billion for the 3rd quarter ended December 31. In the same period, standalone total operating income of the company was at Tk. 2.59 billion, a rise of 15.94% over the prior year period.
• The stand alone 3rd quarter ending EPS, Tk. 111.26 compared to Tk. 89.19, were the better earning position on a Year‐over‐Year basis (grew at 24.74%). The positive growth is attributed to the increased turnover, decreased cost of raw materials and boost from other income despite higher administrative and selling expenses. However, EPS growth on quarter‐over‐quarter basis was sliding at 11.95% due to the leverage effect of slight decline in sales (‐2.99%). Moreover, the same pattern of negative growth rate in top line and bottom line was observed on Q‐o‐Q basis in previous year. The EPS is expected to be Tk. 136.57 for March 2011, resulting a growth rate of 28.32%.
• Though year‐end reported stand alone top line experienced a healthy growth of 16.72%, the net earnings growth declined in 2010, (10.47% compared to previous year’s 36.78%). Though the cost of raw materials reduced slightly, operating profit had increased only by 13.56% compared previous year’s 38.56%, reflection of significant increase in selling and distribution expenses.
• Square Cephalosporins Ltd., subsidiary of the company
making its way to fully operational. Recently, coupled with revenue growth and decreasing cost of materials (‐6.30%) it has added significant cost reduction to consolidated cost of goods sold of SPL.
• The consolidated scenario is quite remarkable according to
the recent quarterly report. The top‐line achieved augmentation of 24.31% mainly attributed by the Cephalosporins unit and the new unit serving all dosages and the new insulin drug. However, the higher COGS resulting from higher exchange rate and new product development costs reduced the gross margin. Moreover, the higher operating costs deteriorated some of the operating profit. On the other hand, amplification in bottom‐line is credited by reduced financial expense and the immense growth in associates’ income. The net profit margin reached to 22.28% at the end of the 3rd quarter, 2010.
• Though the Q‐o‐Q growth in consolidated EPS was slightly downward (‐5.87%), the Y‐o‐Y growth registered growth rate of 33.33%. The consolidated EPS is estimated to Tk. 176.44 (Y‐o‐Y growth rate of 38.61%).
INDUSTRY OVERVIEW
Industry Trend
The following points highlight the health care position and industry performance:
• Healthcare expenditure in Bangladesh, relative to other South Asian countries, is coming from a low base. Until 2005, per capita health expenditure of Bangladesh (US$ 12) was the second lowest after Nepal (US$ 11) in the South Asia.
• Due to widespread vaccination schemes, successful eradication of leprosy and widespread use of oral rehydration for diarrhoea, many of the traditional health problems are minimized and life expectancy has risen to over 60 years – comparable to India and Pakistan rather than to African LDCs who mostly have life expectancies mostly well below 50.
Cause of Death, 2006 Percentage Asthma, Respiratory Disease 16.10
Blood pressure, Heart disease, Stroke 13.53
Fever: Malaria, Typhoid, Influenza, Dengue, Other Fever 7.76
Tumor, Cancer 6.08
Jaundice, Liver disease 3.09
Cholera, Diarrhea 1.94
Malnutrition 1.84
Rheumatism, Rheumatic fever 1.36
Diabetes, Venereal diseases 1.27
Total 52.97
• The most important health issues in Bangladesh today are related to maternal health and malnutrition, vitamin and iron deficiency. AIDS, Malaria and Tuberculosis are potential health threats. Other more important causes of death are Jaundice, liver diseases, asthma, respiratory diseases cardiovascular diseases, diabetes, and cancer. Mental disorders are an important reason for disability.
• The pharmaceutical industry in Bangladesh includes more than 230 small, medium, large and multinational companies operating in the country producing around 97% of the total demand.
• Local large incumbents like Square, Incepta, Beximco, Acme Laboratories, Opsonin, Eskayef, Reneta, ACI, Aristophrma, Drug International etc., and MNCs like GlaxoSmithKline (GSK), Sanofi‐Aventis, Sandoz, Pfizer, Novartis and Astra Zeneca, etc. capture the major market share. These top ten local companies enjoy a total market share of 75%.
• In 2009, the Bangladeshi pharmaceutical market represented demand of around Tk. 79.74 Billion. However, the value of local sales (including the multinational companies) stood Tk. 57.81 Billion.
• The CAGR of last 8 years was 9.56%, which shows that the local production achieved a healthy amount of drug generation level during the period.
• The most important therapeutic Group in the Bangladeshi market is antibiotics. They account for almost 30% of the market.
• Chronic diseases such as diabetes, hypertension, heart disease and stroke are a large and growing burden on the health of
30,501 32,384 32,858
45,950 50,300 51,493
54,940 57,810
‐
10,000
20,000
30,000
40,000
50,000
60,000
70,000
2002 2003 2004 2005 2006 2007 2008 2009
Tk
Year
Value of local sales (Tk. In million)
Bangladeshi people and healthcare system. The rising prevalence of chronic disease is partly the result of a population that is ageing and increasingly obese.
• Self‐medication is an important element of the total market for pharmaceutical products. The leading areas of the market include analgesics, cough and cold treatments and vitamins and minerals.
• HIV/AIDS and Anti‐malarial drugs are untouched by the local producers because of low prevalence rate.
• The producers focus on generics, mostly as tablets and capsules. Anti‐infective is the largest therapeutic class of locally produced medicinal products, distantly followed by antacids and anti‐ulcerants. Other significant therapeutic classes include non‐steroidal anti‐inflammatory drug (NSAID), vitamins, central nervous system (CNS) and respiratory products. However, inject able products, like vaccines, requiring high‐end equipment, superior environment and quality control, is still untouched segment for local producers, hence such demand is met by import.
• Driven by high growth and the consequent cash generation, drug manufacturers have gone into aggressive capacity‐expansion mode. The cumulative settled LC amount from July, 2006 to November, 2010 stood US$ 147.28 mn (around Tk. 9.58 bn). Import of capital machinery statistics indicates significant increase of US$ 27.97 mn in opening of import LCs for capital machinery during FY10, compared to the same period of the preceding year. This represents a growth of 129.43% in FY09 compared to ‐29.59% in FY09. However, up to July‐November, 2010 it shows little growth; 3.41% against 117.10% for the same period of preceding year.
• Import statistics of last 4 fiscal years indicate that finished pharmaceutical product import (opening of fresh LC during the period) rose by CAGR of 20.53%. FY10’s figures of fresh LC worth a total of US$ 83.34 mn against US$ 61.70 mn of previous year. However, the recent July‐October numbers of FY11 reflects a little attempt in the import; a growth of 5.48%, whereas, the same period of preceding year saw a dramatically upsurge in growth rate; 108.60%. The imported drugs mainly comprise of the cancer drugs, vaccines for viral diseases, hormones, etc.
• The opening of fresh LC for API import saw a boost; a growth of 21.09% over the last 4 years, reflecting the remarkable growth expectation among the drug producers and significant increase in price of the API imported. The FY10 end up with around US$ 324.16 mn versus US$ 270.07 mn of FY09. The latest quarter (July to October) statistics is also indicating the same drive as the cumulative fresh LC opening stood US$ 161.00 mn against US$ 120.89 mn of the same period of FY10, a Y‐o‐Y of 33.18%.
• Over the last five years, the price of some basic API except paracetamol, like amoxicillin, tetracycline HCL, doxycycline, cefalexin rose by an averaged 10‐20%. These materials are essential to produce antibiotics and painkillers, first medicines manufactured in Bangladesh, i.e. 30% of the total production.
Prices of Selected Imported Raw Materials for Essential Drugs Average Price (US $ per Kg.)
• Bangladeshi companies have little pricing power regarding raw materials, as they import 80% of the required raw material, mainly from India and China. Few are imported from Europe and USA. China is the biggest producer of antibiotics’ API in the world. The leading manufacturers are therefore going into API manufacturing, focusing mainly on Antibiotics, but also other drugs, as for example anti‐cancer drugs. A list of the API manufacturing companies and the APIs already manufactured in Bangladesh are shown in the table below:
• Salaries represent also an important operating expense for the pharmaceutical industry, where the sales department counts lots of employees to reach as many clients as possible. The account of total personnel expense costs the companies to increase a CAGR of 21% over the last five years.
• As advertisement of drugs in television and newspapers is not allowed in Bangladesh, the pharmaceutical companies rely heavily on differentiated promotional campaigns. Aftermath of the financial crisis, the local producers have made a massive promotional and sales effort to boost sales figure. The resultant is aggregately publicly listed pharmaceutical companies realized increase of 93% in this expense account in 2009.
.
Industry Profitability
Though the pharmaceutical plants are depends on imported API and heavily focus on generic drug products, several factors are expected to shape the outlook of the industry in future.
• First, drug demand is likely to remain quite robust for the upcoming years mainly driven by increasing health consciousness among people and increasing health expenditure both on public and private level; i.e.
Higher disposable income, rising population, changing demographics and lower price of locally produced generic drugs will aid demand.
The development of new treatments becoming available and more patients availing of them.
The acceleration of Government initiatives to improve public health.
• Second, contract manufacturing is one of the major growth areas in drug industry, as the country’s top 10‐12 drug makers have state‐of‐the‐art drug plants. By upgrading their facilities to a level, the producers can do contract manufacturing for foreign pharmaceuticals and export drugs worth Tk200 billion a year.
• Third, capacity building i.e. innovations, strengthening reverse engineering, training local people and upgrading technology is required to remain competitive in the post‐2016 period. API Park will help produce raw materials locally and innovate ingredients as well.
• Fourth, the establishment of API Park in Munshigonj will determine the capacity of producing raw materials locally and innovating ingredients as well, as opportunities of
bioequivalence study, validation report, clinical trials and manufacturing plant audit mechanism will have been created.
• Fifth, though Bangladesh can continue with the patented products up to 2015 as per trade, related intellectual property rights (TRIPS), abuse of available antibiotics can cause nationwide bacterial resistance and people will have to pay a premium price for new on‐patent antibiotics after 2016. However, the essential drugs may have concession of such scenario.
• Finally, another effect, expected this year, on the expenses of companies is the exchange rate. The expected contraction monetary policy taken by Bangladesh Bank will increase the interest rate; the resultant may lead to devaluation of Taka. API, needed for the production of drugs, are imported and paid in USD, BDT’s devaluation became for some companies a real problem and a heavy expense
The Competition
Although the MNCs proclaim the exclusivity of their manufacturing process and brands and with that reason heightened most of their product prices, but still they have managed lower prices for some of their brands and been dominating in several therapeutic categories with competitive pricing.
Even though the local pharmaceutical companies (LPCs) are generally known as offering low prices, they have increased their prices in some instances even more than MNCs. In case of these two therapeutic classes; antihistamines and analgesics, two drugs, that is, Aspirin and Chlorpromazine are very common OTC drugs. The higher price of LPCs here may be explained by the reasons that most OTC products are used in low doses and generally for short periods. The OTC products generally have lower prices. A higher price can ensure some degree of profitability here.
On the other hand, 5 MNC and LPC essential drug products have similar rates, namely Atenolol 50 mg, Glibenclamide, Amitriptyline, Griseofulvin and Salbutamol. These five are all chronic care drug products; they are antidiabetic, psychotropic, antifungal, cardiovascular, and antiasthmatic drugs. Chronic care products for the aging population have been mentioned as the fastest‐growing market of the world. A narrow, but strong and deep focus for chronic care market
makes the competitors more closely facing one another. The price differentiation is therefore minimum here.
Moreover, the local companies now make the high‐tech, expensive drugs like anticancer drugs, insulin in Bangladesh. The prices of the locally produced anti‐cancer drugs and insulin would be 20 to 30% less than the imported ones.
Beacon pharmaceutical Ltd., a subsidiary company of Orion Group is the pioneer of producing anticancer drugs locally. Other leading producers are also on the queue to serve the market within couple of years.
Square Pharmaceutical Ltd. has already set up plant to produce and market insulin locally with a brand name of “Ansulin”. The contribution of insulin market in the drug sector is about Tk. 1.10 billion of which around 80% demand is met by import. The most popular insulin brand, “Mixtard”, comes from Denmark, the base of Novo Nordisk, the global leader in diabetes care. The world’s biggest insulin maker Novo Nordisk and Eskayef Bangladesh Ltd, a concern of Transcom Group are going to produce this drug jointly within a year, providing the world‐class insulin in the country within affordable price range.
FUTURE OUTLOOK It is considerably expected that
It will be able to maintain competitive edge in brand loyalty and transfer most of the increasing price of the raw materials to consumers.
One of the major growth drives will come from the upcoming additional production placed by the new plant, as the company has the facility to produce Solid Doses Form, Large Volume Parenteral (LVP) and Special products such as Anticancer and Anti‐diabetes (insulin) Drugs.
The contribution of the investment associates will accrue a significant bottom line effect in the income statement, as earning from Square Hospital will converge to eventual breakeven point shortly.
Gross profit margin will slightly be to 44% and Net profit margin at around 21‐27% with the wave of better effect of economic scale and increasing associates’ income over the volatile raw material prices and higher operating cost, indicating a positive outlook.
COMPETITIVE EDGE VS RISKS FOR THE FUTURE
Core Competencies • SPL is considered an excellent drug producer with nationwide 50
years of operational experience of producing drugs. • Competitive source of raw materials through the API division. • All formulation units are GMP certified approved by UK MHRA.
Careful selection and scientific proportioning of raw materials with the use of latest technology enables manufacturing of high quality drugs.
• Strong sales force and effective distribution system Risks
• SPL still faces many issues regarding Anticancer and Anti‐
diabetes drugs to be produced by the year 2016. The demand for these special high‐tech drugs are currently met by the foreign companies or by import. There is much contest in ‘insulin’ as Eskayef will be able to provide lower priced top class popular ‘Mixtard’ to the market from next year. There is conjecture as to whether SPL will capture the planned 10% market share with its sales force. Moreover, the anticancer
+ Many different buyers
‐ Low switching cost
Bargaining Power of Buyers
High
Moderately High
Moderate
Moderately
Low
Low
‐ Herbal and Homeopathic
Threat of Substitute Products
High
ModeratelyHigh
Moderate
Moderately Low
Low
+ Import dependent
+ Controlled by foreign suppliers
Bargaining Power of Suppliers
High
Moderately High
Moderate
Moderately Low
Low
‐ Large number of players
‐ Low switching cost
‐ high exit barrier
‐ High storage costs
Rivalry among Existing
Competitors High
Moderately High
Moderate
Moderately Low
Low
+ High fixed costs
+ High requirement of quality control
‐ Marginal product differentiatio
Barriers to New Entry
High
Moderately High
Moderate
Moderately Low
Low
drugs are already produced locally by Beacon Pharmaceutical Ltd and will be served by the other local firms within couple of years.
• The real barrier, hindering access to treatments is in fact a lack of the basic healthcare infrastructure required to get existing medicines to people. Other factors such as a lack of access to basics like food, decent housing and clean water, armed conflict, corruption, bureaucracy and the lack of simple prevention measures like condoms and mosquito nets, unfortunately mean that poor health is endemic for the poorest people.
• Square is currently well positioned to counter any competitive threat, either from existing or new competitors. However, in the event that these competitors make serious inroads into SPL’s market, the result could severely limit the growth potential of the company in the future.
• As the company will not be able to sell on‐patent molecules, it may stand to lose the some of the market to multinational companies by 2016. In addition, technology transfer for production of APIs and selected finished drugs (like newly patented second‐line ARVs) from MNCs will increase prices of drugs, may cause some reduced demand in the future.
• The cost controlling will be eminent from government if the authority lists some of the drugs as essential drugs.
FINANCIAL ANALYSIS Earning Quality and Cash flow Analysis
• The latest years’ accrual amounts are much less than the early
years’ of analysis. Moreover, the lower Accrual ratios indicate an encouraging tendency of improving earnings quality. In 2008‐09 and 2009‐10, they are significantly lower than in the earlier year, indicating a lower degree of accruals present in the company’s earnings.
• The cash flow and earnings relationship indicates that except the year 2006‐07 and 2007‐08 the operating cash flow before interest and taxes substantially exceeded the operating earnings. The discouraging fact is in 2006‐07 and 2007‐08 the cash flow was substantially low compared to reported earnings signaling red flag of earning quality.
• The 2008‐09 cash return on total assets is the highest of
18.41% in the five year span and the 2008 generates lowest of 10.14%; showing parallel relationship in cash generation.
Earning Quality Measures 2005 2006 2007 2008 2009
OCF before interest and Tax/ EBIT 1.04 0.89 0.97 1.11 1.11
Cash flow to reinvestment 0.79 0.54 0.70 1.35 1.77
Cash flow to total debt 0.93 0.71 0.77 0.85 1.36 Years to repayment of debt after reinvestment ‐5.33 ‐2.58 ‐4.78 6.14 2.42
• The recent strong and improving OCF has enabled
management to put more cash into investing for the company’s future growth.
• The increasing cash to debt ratio indicates strong cash generations to total debt outstanding, explaining borrowing capacity of the company should an investment opportunity arise. Moreover, the capacity to pay off its debt is
approximately within the next three years even while maintaining its current reinvestment policy. Judicial
Liquidity and Solvency Analysis • Liquidity position of SPL is better than that of all listed drug
producers but Beximco Pharmaceutical Ltd. However, the liquidity and solvency position of GSK is the finest, consequential of very low fixed asset base, SPL pose fair candidate of taking debt should investment opportunity arise.
• Additionally, liquidity position pose unprecedented Cash ratio
in 2009‐10. This may be explained by the increased investment in marketable securities and short‐term loans. This is backed by better cash collection from accounts receivables account, and the minimum level of short‐term debt and low level of creditors account in current liabilities.
• The changing financing strategy is shifting debt financing to internal financing which will reduce the cost of financing.
Efficiency Ratio
Year 2005 2006 2007 2008 2009
DSO 33.61 30.60 28.79 21.12 13.92
DOH 120.56 126.55 132.03 131.0 123.62Less: Number of days of payables
37.02 32.21 18.19 12.15 7.49
Equals: Cash Conversion Cycle
117.15 124.94 142.63 140.0 130.05
• The decreasing DSO explains the lower amount of credit sales
and high rate of collection from account receivables. However, this favorable situation is offset by the decreasing number of days payable implying tight credit terms granted by the suppliers.
• The higher number of DOH implies the regular demand of the drugs causing high stockpile for the companies. The SPL’s revenue growth at the industry’s growth and the lower DOH compared to similar companies implies the greater inventory management efficiency.
• Comparing cash conversion cycle among the listed producers from the following table, greater cash cycle indicate they require additional capital to fund working capital. Though Ibne Sina Pharmaceutical Ltd. shows better liquidity management among the companies, comparing with giants SPL’s cash cycle is much superior.
Productivity Ratio • Over time, labor and capital productivity indicators are
dropping off. SPL’s per employee marks are climbing over the years. However, the combining effect of the undersized new workforce with higher cost of materials dictates the climbing per employee marks. The opposite scenario of productivity
metrics are implied by the fact of huge growth of operating expenses specially the personnel expense.
• SPL is outperforming every listed drug producers on labor metrics indicating efficient management and labor.
Productivity Ratios 2005 2006 2007 2008 2009 Value Added/Salaries and Wages 11.37 11.05 8.77 8.98 8.61 Value Added/machinery and Equipment 1.04 0.76 0.86 0.98 0.96
Value Added/No of Employee* 1.14 1.23 1.27 1.41 1.52
Sales/No of Employee* 2.36 2.42 2.45 2.77 2.82 *Taka (In Million); Note: Value Added includes Profit, labor cost, salary cost, and selling and administrative expenses.
• The plant efficiency (capital productivity) of SPL has low figure than the listed companies’, mainly due to the induction of new plants and the higher asset base.
Productivity Ratios Labor Capital Sales to Employee*
Reneta 3.89 1.48 1.46
Beximco 3.97 0.19 1.94
GSK 3.61 3.13 4.93
Ibne Sina 2.16 1.80 0.56 * Taka (In Millions)
Earning Decomposition
• The presence of associate investment provides significant share of income to the consolidated ROE. Impressive aggregate net profit margin came from the associates’ earnings, explaining the recent year’s up gradation in ROE.
• Decreasing financial leverage corresponding finer position, and parallel increasing asset turnover pose superior profitability and productivity of the business.
• Comparing with the listed firms, SPL’s ROE placed 2nd lowest. However, with low financial risk and defensive depreciation principle SPL generate superior ROE.
VALUATION Intrinsic Value After thorough analysis of industry cycle, stage of the company and future growth potential, we have adopted Discounted Free Cash Flow (DCF) method for valuing SPL stock. DCF is a widely accepted method for equity valuation. The following table illustrates the forecasted Free Cash Flow of SPL:
(Figures in Millions except per share data) 2010 2011 2012 2013 2014EBIT 4,595.4 5,253.6 6,118.6 7,340.0 9,116.0
P.V of Free Cash flow 2,547.6 2,603.2 3,125.7 3,560.8 3,988.5
Terminal Value 89,257.4Total P.V of FCF (A) 15,825.8
P.V Terminal Value (B) 52,847.6
Enterprise Value (A+B) 68,673.3
Less: Net Debt ‐216.2
Equity Value 68,457.2
Outstanding Share 19.62
Per Share Price 3490 Key Assumptions The key assumptions for the DCF model are as follows:
• Required Rate of Return (Discount Rate) is assumed at 14.00% is assumed. The discount rate is derived as follows: 5 year BG T‐Bond Rate (Risk Free) 8.26%Assumed Risk Premium 5.74%Required Rate of Return 14.00%
• Revenue Growth is assumed to be at CAGR of 17.00%
during the projected years. • Constant Growth Rate is assumed at 6.0% considering
the following factors: Long run economic nominal growth rate of 7% 1.3% population growth
Value of Associates By virtue of the ownership in associate companies, contribution of these companies to the earnings of SPL as a whole is significant. Among these companies, Square Textile Ltd. is valued in the public market separately and its discrete valuation is adjusted to the pure SPL valuation. Additionally, value of other non‐listed associates are estimated by adjustment factor of 3.00% on total per share price of SPL (including all associates values). The adjustment factor is inferred on basis of the companies’ contribution to the net income to SPL and growth prospect of these businesses in future.
Square Textile Ltd.
Square Hospital
Square Knit Fabrics Ltd.
Square Fashions
Ltd. Proportion of Ownership Interest 46.45% .49.56% 48.84% 48.46%
Contribution to the Net Income 4.85% ‐4.39% 2.09% 2.68%
Equity Value (in Millions) 10,529.8 ‐ ‐ ‐ Value to SPL (in Millions) 4,891.1 ‐ ‐ ‐ Adjustment Factor 7.14% 3.00% Increase/(Decrease) in Price Per Share 249.3 115.6
Price Per Share without Associate 3490 Total Per Share Price 3855
Simulation and Sensitivity Analysis From simulation analysis, we have found that the firm value is most sensitive to the changes of cost of capital, cost of goods sold and terminal growth rate. The following table exhibits a sensitivity analysis based on two variables:
• SPL’s trailing P/E (based on June close price) ranged from 9.23x‐24.30x with an average of 19.47x over last 5 years.
• Forward P/E of 18.37 is lower than the historical average, but less than the industry.
• The forward P/E is expected to be close to higher end and to be higher than the average. Thus, P/E multiple is estimated within the range of 20x‐22x.
• With forward earning of TK 176.44 per share, we get a price range between TK 3528.81 and TK 3881.68.
2005 2006 2007 2009 2010
P/E (Trailing) 9.23 21.61 24.30 19.32 22.91Average 19.47Industry (Forward) 18.95 Ms Value
We are initiating coverage of Square Pharmaceuticals Ltd. with a Ms Value of Tk. 3855 a share. Certainly, from a fundamental standpoint, the Company is exhibiting phenomenal growth and financial strength in the midst of a global recession and recent economic slowdown due to power crisis. We feel this is a testament to the increasing industry demand and business model that SPL is executing, and certainly solidifies our confidence in the Company moving forward. Value is not timeless. However, we reasonably expect that the MS derived value will remain effective for the next three months.
Analyst Team
• Mahmudul Bari • Arif Khan • Noman Ahmed Khan • N. M. Al Hossain • Md. Farjad Siddiqui • Qazi Mussadeq Ahmad • Syed Abu Redowan
M I N D S P R I N G R E S E A R C H
Rahman’s Regnum Centre, 601/A (6th Floor), Plot No. 191/B, Tejgaon‐ Gulshan Link Road, Tejgaon C.A., Dhaka‐1208
