FIDSON PLC. Investment Summary & Highlight. Fidson PLC: a see-saw to the top? MorganCapital Research. July 10, 2013

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1 African Frontier Market leading the Global Investment Path to Africa TM July 10, 2013 Chuks Anyanwu , Stock Rating BUY Industry View In-Line FIDSON PLC EQUITY NIGERIA HEALTH CARE Investment Summary & Highlight Fidson PLC: a see-saw to the top? Q1-2013: Sales and Net income improve impressively by 55% and 6 respectively YoY. Fidson PLC ( Fidson or the The Company ) on Monday 20 th May 2013 released its unaudited Q result. Sales rose by 55% to N2.62 billion from N1.69 billion YoY, while net income advanced by 6 to N194.50million from N121.39million YoY. The vastly improved performance in Q came on the heels of an FY report which saw a marginal growth of 1% in sales translated into an impressive 272% growth in net income. The Company s input cost and operating expenses rose by 56% and 58% YoY respectively, both cost lines rising ahead of the sales growth. This consequently put a strain on the Company s profit margins as gross margin declined slightly to 56. from 56.3% while operating margin declined to12. from 13.3% YoY. Finance cost declined steeply by 22% between Q & Q which is quite impressive, considering that the Company s short term and long term financial liabilities has risen by 3% and 9% respectively between FY 2012 and Q According to the Finance Director of Fidson, who met with our research analyst to discuss company affairs, the Company now gets a lot more of its credit from the Bank of Industry, with significantly lower interest rates compared with commercial banks, to fund its expansion. Fidson PLC in 2005 became the first Company in sub Saharan Africa to manufacture antiretroviral drugs and has continued to make giant strides in the sector. According the Finance Director, the Company s infusion plant, the latest in its expansion pursuits, located in Ota, will hopefully be commissioned in December The Finance Director also hinted that the Company has launched new product lines in the herbal space in other to capture that market and stressed that all of the Company s herbal products were scientifically proven. We expect these innovations to boost the Company s earnings capacity going into fiscal year 2013 and Bloomberg Ticker: FIDSON:NL NSE Symbol: FIDSON Listed on the Nigerian Stock Exchange Key Ratios & Statistics Current Stock Price: N2.00 Fair Value: N2.34 Outlook: POSITIVE Market Capitalization: $18.75M Year End: December Price-to-Earnings (PE) 2012Trailing: 15.38X 2013 Forecast: 5.55X 2014 Forecast: 4.44X Earnings-per-Share (EPS) Current: (FY 2012): 13K 2013 Forecast: 36K 2014 Forecast: 45K Dividend-per-Share: 12K Return-on-Equity: 3.96% Return-on-Asset: 1.92% Outstanding Shares (m n) 1,500 Free Float: (m n) 829.5(55.3%) Year-to-Date: 85.2% Latest Result Q Q a glance N (m n) N (m n) Q Q % Sales 2,624 1,696 55% PBT % PAT EPS 13K 8K 62%

2 2 Valuation shows that Fidson is undervalued. The stock is currently trading at a 17% discount to our fair value estimate of N2.34, with a 12month investment horizon. Our fair value computation is based on our financial performance expectation for FY We placed a positive outlook on the health care sector despite the present challenges in the sector because of the capacity for growth in the sector. Earnings Projection Our FY 2013 sales estimate for Fidson PLC is N8.03billion ($50.18M) which translates to a 12% improvement relative to FY 2012, while our net income estimate is N546.10million ($3.41M) and equates to a % improvement relative to FY This yields an EPS of 36K and a forward P/E of 5.55X. We expect the Company to sustain the growth trend recorded in Q as the year progresses and expect the Company s finance cost which declined by 1 at FY 2012 and 22% at Q to maintain this trend as the Company strives to sustain a high level of efficiency in managing this cost line. Our expected growth in bottom line is also supported by our expectation that the Company will benefit from the tax allowance initiative of the Government when it commissions its Infusion plant in Ota, Ogun State Nigeria. We downgraded our EPS projection for FY 2013 after our meeting with the Finance Director of the Company from 56K to 36K to align with the Company s EPS expectation for FY 2013 and consequently adjusted our fair value estimate to N2.34 from N2.52 and our FY 2013 dividend expectation to 30K, from 45k in our other research publications % 4 35% 3 25% 2 15% 1 5% SALES & PBT GROWTH 3% 39% -26% 152% 1% 2% Sales 2% 39% 1% PBT 3% -26% 152% 11.9% Sales 3 YEAR CAGR ( ) 15.1% Finance Cost 17.5% Admin Exps PBT -5.6% The Company s sales growth has been inconsistent over the past three fiscal years, same with the pre- tax income growth. Sales PBT CAGR Finance cost and Admin expenses have experienced more aggressive growths compared with Sales and pretax profit over the past three Years. The reverse should actually be the case for sustainable growth. Overall, we expect an improved performance from the Company on a year on year assessment for FY 2013 and The company has continued to reinvent itself and has invested in research and development which is evident in the launch of its new product lines and the giant strides it has made in the Nigerian health care sector. Our outlook for the sector is also positive and despite the challenges which range from high cost of funds, to high cost of operating in Nigeria. From the inefficiencies of government agencies to protect our borders and consequent in-flocks of comparatively cheaper health care products which creates an unhealthy competition for the indigenous companies like Fidson etc. The sector still has a huge capacity for growth given the demography of the country and the huge opportunity it presents for companies like Fidson, given the right government health care policy. ROE & ROA % % % % 0.6% 0. ROE ROA Fidson s ROE and ROA over the past three fiscal years were not speared the inconsistencies as it has experienced a topsy turvey effect over the period

3 3 Valuation Analysis Our fair value for Fidson PLC shares was calculated using the Dividend Discount Model comprising our expected dividend estimate for the company and a MorganCapital customized tweak to adjust for the risk of investing in the Nigerian health care sector. Our Required Rate of Return (RROR) factors in a risk premium of 7% and the yield for the most recently issued 20-Year FGN Bond was applied as the risk free rate of return. Our projected dividend of 30K for FY 2013 which amounts to an 83% dividend payout ratio is based on our earnings estimate for FY Investment Conclusion PROFITABILITY MARGINS 55% 57% 57% % 11% 13% % 3% 8% GPM OPM PBTM Gross margin improved from 55% to 57% between FY 2010 and FY Operating margin and pre-tax margin on the other hand experienced a see-saw effect. An undervalued stock based on our research, with focus on our FY 2013 estimates. The Company has grown its sales figure over the last three fiscal years by 12% (CAGR) and has been efficient in managing its borrowings despite the huge investment in capacity over the last two fiscal years. Administrative expense however has grown ahead of sales over the last three fiscal years, on an average growth rate of 17.5%. Pre-tax profit suffered a worse fate as it has declined by 5.6% on the average over the past three fiscal years, depressed by the growth in finance cost and administrative expenses over the period. We expect this position to improve going forward as the Company wraps up its Ota plant and other expansion programs. However, we expect Management to also pay attention to its administrative expenses in other for the benefits of the investment in capacity which we expect to reflect on its sales growth, to be translated to bottom line improvement.. Overall, we see a company that has taken the initiative to deepen its market share in a very competitive market by consistently reinventing itself to adapt to the challenges in the sector. Despite the seemingly inconsistent performance particularly over the past three years, we think the company has a good growth strategy. We retain our Buy recommendation on the shares of Fidson for the short term and will re assess our medium and long term outlook for the stock as new information becomes available.

4 4 Investment Risks To our Fair value. Exchange rate volatility: This is a major factor that can impair our earnings estimates. Fidson like most other indigenous pharmaceutical companies depend a lot on importation for its raw materials. This exposes the Company to exchange rate shock, as a crash in the Naira will see a significant spike in the Company s direct cost of sales which will impair bottom line. Effect of competition from cheaper imported brands: As a result of the porous borders, the Company may have to contend with the activities of smugglers who flood the market with cheaper products compared to the indigenous companies. This constrains the Company s capacity to generate sales and impairs bottom line. Spike in production Cost: An increase in production cost ranging from power cost, cost of distribution, and other production cost can impair our earnings expectation, as a bloating cost line depresses bottom line profits (F) 2014(F) MARKET CAPITALIZATION (N'm) ($) GROSS REVENUE (N'm) 5,100 7,127 7,169 8,029 8,992 PROFIT B/F TAX TAX PROFIT AFTER TAX EARNINGS PER SHARE (EPS) PRICE-EARNINGS RATIO SHARE CAPITAL OUSTANDING SHARES (M'n) 1,500 1,500 1,500 1,500 1,500 OWNERS' EQUITY 5,230 5,190 5,228 5,402 5,680 CASH DIVIDEND 22K 10K 12K 30K 36K SCRIP DIVIDEND Nil NIL NIL NIL NIL In our analysis, Fair value is our opinion of the actual fundamental worth of a stock, irrespective of what the market is willing to pay for the stock. A BUY rating from us in our opinion, prompts investors to purchase the stock guided by their risk appetite A SELL rating from us in our opinion, prompts investors to exit the stock. A HOLD rating from us in our opinion, prompts investors to desist from buying the stock if they do not already have the stock, and not sell if they already have the stock. MorganCapital Securities Ltd The Pent Floor 3, Biaduo Street, Off Keffi Street, S/West Ikoyi. P.O.Box Victoria Island, Lagos ,

5 5 Analyst Certification Where applicable, the views expressed in this report accurately reflect the analysts' views about any and all of the investments or issuers to which the report relates, and no part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations, views or corporate finance transactions expressed in the report. Conflict of Interest MorganCapital Securities Ltd and its sister companies within the MorganCapital Group may execute transactions in securities of companies mentioned in this document and may also perform or seek to perform investment banking services for those companies mentioned herein. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and report(s). Disclaimer The contents of this report are obtained from publicly available sources and in good faith but no representation or warranty, either express or implied, are made to its accuracy or completeness. This report is not an offer to buy or sell or a solicitation to buy or sell securities, where mentioned. This report is distributed (through s) in the United States, Europe, Asia and Africa by MorganCapital Securities Limited and its Sister Companies within the MorganCapital Group all operating in Lagos, for general circulation only. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to specific clients. The financial instruments discussed in this report may not be suitable for all investors thus investors must make their own investment decisions based upon their specific financial situations, investment horizons and investment objectives. If a financial instrument is denominated in a currency other than an investor's currency, a change in exchange rates may adversely affect the price or value of, or the income derived from, the financial instrument, such an investor effectively assumes currency risk. In addition, income from an investment may fluctuate and the price or value of financial instruments described in this report, either directly or indirectly, may rise or fall. Furthermore, past performance is not necessarily indicative of future results. MorganCapital Securities Limited and its sister companies within the MorganCapital group are not licensed to distribute research reports in the US, Europe, Asia or other African countries thus this document must not be acted on or relied upon by persons who are not Relevant Persons, as defined in the paragraph below. Any investment or investment activity to which this document relates is only available to Relevant Persons and will be engaged in only with relevant persons. Relevant Persons are persons who are clients or staff employed by MorganCapital Securities Limited or its sister companies within the MorganCapital Group.