Some more thoughts on EGIS

Following the first post two days ago, some more thoughts on EGIS:

Servier Group Diabetis drug scandal

One commentator mentioned, that Servier Group, the French parent is part of maybe the biggest pharmaceutical scandal in France ever. According to this article, at least 500 deaths are linked to a Diabetis drug of Servier.

Interestingly, already in 2011, EGIS denied having distributed or licensed this Drug from Servier. However they admitted, that they manufactured some of the ingredients and delivered them to Servier.

If Servier really gets fined heavily for this case, then in some aspect or another, EGIS will feel the impact. As we have seen, the internal business with Servier might be at risk.

Forinth/Hungarian interest rates

Standard CAPM tells you that you should use the risk free rate of the country a company is located as a basis to determine cost of capital. Although for EGIS this would clearly be a mistake as only 20% of their business is in Hungary. Nevertheless, I expect some tailwinds from the decrease of 10 year Hungarian Government yields from ~8.50% to 5% over the period of the last 12 months. This week, the Hungarian Central bank cut the short term rate for a 10th consecutive month.

If we compare for instance the performance of the Hungarian BUX Index for the last 12 months (+17%) against Italy (+34%), Spain (+34%), we can see that the Hungarian Index does not look extremely overvalued and with a level of 19000 would still have 50% upside to the ATH from 2007. So at some point in time there might be some kind of “catch up rally” for the Hungarian market as well.

Management/Reporting/Shareholder orientation

I cannot say anything about management so that’s neutral. Same for shareholder orientation. Ok, no buy backs or big dividends, but on the other side no negatives. Communciation is good. The annual reports. quarterly reports and analyst presentations are clear and easy to understand.

Other stuff

In March, EGIS and its US Partner Actavis settled a court case with AstraZeneca, which, according to some reports has a value of around 50 mn USD for EGIS starting in 2016.

Relative valuation

Lets look at the German generics company, Stada AG.

Stada Trades at the following multiples:

P/B 2.1
EV/EBITDA 10
P/E Trailing 19.5

ROE/ROCE have been a lot weaker in the past than EGIS, around 7% ROCE, and 8% ROE. Even if one considers that Stada is a potential take over target, I do not understand why Stada is trading roughly on 3 times the valuation of EGIS despite being less profitable over a long time period.

Looking at a more comprehensive list of generics companies, we can see that EGIS is by far the cheapest one. Only the Russian companies are at least comparable cheap. As EGIS does now a third of its business there, one should keep this in mind. Personally, I highly prefer to invest into a Non-Russian company doing in Russia than directly into a Russian company. C

Name Curr Adj Mkt Cap P/E Curr EV/T12M EBITDA Price/Sales FY2 P/FCF P/B
 
KRKA 1788.66 10.4 6.29 1.30 15.22 1.3
PHARMSTANDARD-CLS 1959.3 7.7 5.17 1.31 7.92 2.13
TEVA PHARMACEUTICAL IND LTD 25510.28 19.65 7.88 1.58 8.79 1.46
EGIS PHARMACEUTICALS PLC 562.52 7.82 3.75 1.04 8.23 0.85
HIKMA PHARMACEUTICALS PLC 2218.16 28.48 13.58 1.98 29.26 3.44
STADA ARZNEIMITTEL AG 2015.25 19.7 10.01 0.93 11.13 2.14
DEVA HOLDING AS 221.38 14.28 8.77   0 1.37
VEROPHARM 171.07 6.01 5.15 0.70 0 0.83

Absolute valuation

I think one doesn’t need to be to sophisticated here. A decent company like EGIS with a solid, non cyclical business should not trade at a P/E of 5 and P/B of 0.8. A fair price in my opinion, taking into account some issues from above should be a P/E of 10 or 1.5 times book, which would be still significantly below western peer companies.

Stock price

The stock price went up quite a bit since EGIS published quite positive 6m results a few days ago. Although one should mention that part of the positive development was driven by a positive FX result in the second quarter.

Summary:

EGIS combines some aspects which I personally find very attractive in “real” value stocks:

+ it is a very solid unspectacular business with solid returns over the cycle
+ the balance sheet is rock solid
+ valuation is extremely low both absolute and relative to peers
+ low valuation can be explained at least to a large extent by negative headline news which in EGIS case are not really justified

For me it looks a bit similar to Total Produce 2-3 years ago, where it was considered an Irish stock. If I have the choice, I actually prefer to invest in solid companies in troubled countries compared to more troubled companies in solid countries.

There is clealry some risks like

– Hungarian politics and tax risks
– court trial for Servier Group
– potentially bad/risky acquisitions

As a result, I will make EGIS a new HALF POSITION in the portfolio with 2.5% portfolio weight at a price of HUF 20.000 (*) per share..

DISCLAIMER: Please do your own research. The author might own the stock discussed already prior to posting it on the blog. Never follow blindly any tips, especially from internet sites. The information provided on this blog represents the subjective opinion of the author. Important issues might be interpreted wrong or even missing.

(*) It took me some time to finish the blog posts about EGIS. When I made my decision, the share traded at 20.000 HUF.

13 comments

  • Der Bewertungsunterschied zu Stada und TEVIS erklärt sich zu großen Teilen bei den erwarteten Ergebnissen für 2013 und später:

    Stada, EPS12: 1,44€; Stada EPS13e: 2,64€; Stada EPS15e: 3,60€ –> PER 2013= 12,3
    TEVI, EPS 2012: 2,25€; EPS 2013e: 4,27€ –> PER 2013e= 9,1
    EGIS, EPS 2012 2380 Ft.; EPS13e: 2.630 –> PER 2013e= 8,0
    Die Unterschiede lassen sich mit Diktatorenabschlag, Währungsrisiken (wie entwickelt sich der Forint?) und Servier-Risiko schon wieder einigermaßen erklären.
    Allerdings hat EGIS in der Krise deutlich stabilere Gewinne erwirtschaftet, das ist auch viel wert.

  • On Nasdaq OMX. But it’s difficult to get access to. Frankfurt is an option, but with lower volume.
    Company is from Latvia, sorry. They are aquiring small latvian company silvanols this year. Figures are a little bit skewed because of advanced sales to Ukraine in 2012 and corresponding receivables which lead to decrease in sales 1st quarter 2013 to Ukraine.
    Main markets are Russia, Latvia, Ukraine, Belarus, Kazakhstan and the UK.
    Financial debt did rise due to aquisition of pharmacies in 2012, but interest rate euribor+1,2% is imho low and equity ratio ~70% still.

  • Egis looks like good value.
    Did you also come across Lithuanian Olainfarm? http://www.nasdaqomxbaltic.com/market/?instrument=LV0000100501&list=2&currency=LVL&pg=details&tab=reports Looks better technically and still good value, although the stock has run up. Has high and rising ROE and ROA for the price.

  • mmi do you know what type of generics? do you understand what EGIS do, their legal and competitive positions and lifecycles etc? or is this less relevant to the investment thesis?

    • well, i guess they do not have a dominantmarket position. In fact it might be not thatgreat.But this is an EV/EBITDA 3,P 5 share with no debt. So if they are doing just OK, the stock will do OK.

    • The top30 generics are listed in the annual report on page 79 of the PDF. The best-selling drug is chloropyramine, an old anti-histaminic that is still for sale in Eastern Europe. The competition of the drugs that EGIS sells is probably mainly through the price as most/all? of these drugs can be purchased from other companies as well.

  • Interesting case with Egis. When taking a look at the peer group, the national competitor Gedeon Richter might also be a good idea to scan. Any special reasons, why there were not regarded? They are large, have a solid business model and are quite profitable as well …

  • What Broker do you to purchase Hungarian shares?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s