Rising margin pressure Slovenia Current price Pharmaceuticals Fair value Performance over IFRS cons FY/e 31.12 Absolute Sales (€ m) Relative to SVSM EBITDA (€ m) EBIT (€ m) Net income (€ m) 12M Hi/Lo EPS (€) Bloomberg DPS (€) Market cap Next corporate events Dividend yield (%) EV/EBITDA* (x) Although the revenues of Krka remain relatively resilient to the economic crisis, to reflect higher-than- expected margin pressure in CEE and CIS, we have revised downwards our earnings forecasts and valuation for the company. We continue to forecast write-offs of € 10.9m on overdue trade receivables in CIS in 2009 and expect that Krka will need to give further smaller price allowances to CIS wholesalers. On the back of rising margin pressure, we have lowered our net profit forecast by 2.0% to € 231.3m (+48.3% y/y) for 2009, 4.2% to € 219.8m (-5.0% y/y) for 2010 and 4.8% to € 233.0m (+6.0% y/y) for 2011. Factoring in a marginally lower risk-free rate, our fair value estimate has edged down 5.2% to € 97.4 per share, although this still implies 36.9% upside. We maintain our Buy rating on Krka, which remains our top pick in the CEE pharma sector. Buy rating maintained • New product launches boost sales: Krka recently obtained marketing registration from the European
Medicines Agency (EMEA) for its generic version of Plavix (clopidogrel), Viagra (sildenafil), an Alzheimer drug (rivastigmine) and Novonorm (repaglinide). The company also won lawsuits recently that lifted the ‘temporary ban’ on sales of several of Krka’s high potential generic drugs containing the active ingredients valsartan and montekulast. We estimate these new drugs could add € 20m to Krka’s top line in 2009 and € 30m in 2010.
• Pessimistic consensus forecast: Our 2009 net profit estimate is 36% above the consensus as we expect
reversal of earlier created provisions. In May the European Patent Office ruled that Krka had not infringed the patent on atorvastatin (active ingredient in Lipitor, Pfizer’s blockbuster anti-cholesterol drug). Thus by the end of 2009 we expect Krka to reverse the € 69.3m provision created for this issue. The release of this provision is the key reason for the € 70m difference between the consensus and our own EBIT estimate for 2009.
• European Commission’s investigation poses a risk: The EU has started an investigation into the potential
collaboration of Servier, Krka and three other generic pharma companies in hindering the generic entry of perindopril into the EU. Although Krka is confident that the claim is unfounded, in a worst-case scenario we believe the fine could amount to several million euros.
• Our top pick among CEE pharmas: On a 2010F P/E of 10.9x, Krka trades at a 3% discount to CEE peers.
However, we believe a premium is warranted by Krka’s safe business model, deep generic pipeline and the management’s sound track record. Our fair value implies a 2009F P/E of 15.0x, or a 40% premium to our estimated fair P/E for the sector. The highly attractive valuation of Krka makes it the top pick in our CEE pharma universe.
Refer to important disclosures, disclaimers and analyst certifications at the end of the body of this research.
This publication has been prepared by KBC Securities N.V.’s Polish Branch, KBC Securities Hungarian Branch Office, and Patria Finance a.s. (Czech Republic) and is distributed through KBC Securities NV or one of its subsidiaries (collectively “KBC Securities”).
KBC Securities Hungarian Branch Office’s registered seat is 1051 Budapest, Roosevelt ter 7/8, Hungary. KBC Securities Hungarian Branch Office is supervised by the Hungarian Financial Supervisory Authority (HFSA). This investment recommendation has been prepared for Hungarian clients but it can be made available to other people as well. No part of this publication may be reproduced in any manner without the prior written consent of KBC Securities or KBC Securities Hungarian Branch Office This publication shall be made public immediately after it has been prepared, on the date indicated on page 1. The date of the closing rate indicated in the publication is the day directly preceding the date of publication of this publication/report.
The definitions of terms applied in the publication: EBITDA = EBIT + amortization and depreciation EPS = Net profit / No. of shares outstanding
NBV per share = Net Book Value / No. of shares outstanding
CFPS = Cash flow / No. of shares outstanding
Net Financial Debt = Financial debt – Cash equivalents
EV = Market Capitalization + Net Financial Debt
P/CF = Stock Price / (Net Profit + amortization and depreciation)
Gross Dividend Yield = Dividend per share / Stock
List of recommendations concerning Krka issued by KBC Securities NV during the last 12 months Valuation (€) Market price (€) Recommendation Date of issue
The recommendations and estimates relating to market values published by KBC Securities Hungarian Branch Office shall be valid for 12 months or until modified. We intend to update the recommendations quarterly. KBC Securities Hungarian Branch Office applied the following assessment methods to compile this investment recommendation: discounted cash-flow (DCF), sector comparison and summary of parts (SOTP). An advantage of using DCF is that future financial profits are also calculated, on the other hand, it is a disadvantage of the model that predictions relating to future financial performance are greatly influenced by the analyst’s opinion. Sector comparison is more independent of the analyst’s opinion but it is usually based on current financial results that might differ from future performance. Analysis based on the summary of parts (SOTP) is advantageous inasmuch as it can be used to compare assessments in cases when a company to be assessed has significant fixed assets and reserves; on the other hand, the method will not take into consideration either the short term or long term growth potential. Interpretation of the recommendation:
BUY – total return is expected to appreciate 10% or more HOLD – total return is expected to be between 10% and –10% SELL – total return is expected to depreciate 10% or more
During the last quarter KBC Securities NV Branch in Warsaw issued 42recommendations:
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