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19 January 2010
MARKETING MATERIAL
PHARMACEUTICAL RETAIL
PHARMACY CHAIN 36.6
Minority Dilution
SELL Rating reduction. In this note we downgrade our rating and fair value for Pharmacy
Chain 36.6 (36.6) to factor in the company’s SPO in late Dec 2009. The pharmaceutical
Fair value $1.9 retailer raised $77mn through the placement of 85.5mn new shares. However, on the
back of the associated 10x dilution of its minorities’ stake and the relatively minor
Potential downside 68% change to the company’s fundamentals, we rate the stock a SELL (previously Under
Review) with a fair value of $1.9 per share. Our new fair value implies 68% potential
downside.
Bloomberg code APTK RU
Reuters code APTK.MM
Price (ordinary, $) 5.8
Ownership uncertainties. 36.6’s founders no longer have a controlling stake in the
Price (pref, $) nm chain, while according to Vedomosti (12 Jan), Akada Establishment Ltd, which has
Upside potential ‐68% acquired a 25% stake in 36.6, is likely to be a subsidiary of pharmaceutical distributor
ADR ratio (x) na SIA International, which holds a large proportion of 36.6’s payables. These payables
Share data amount to roughly $100mn, according to Kommersant data. The company does not
No. of ordinary shares (mn) 95.0 comment on its ownership structure.
No. of pref shares (mn) na
Daily t/o ($mn) 1.8 We believe that 36.6 will use the SPO proceeds to pay down its short‐term debt ($50mn
Free float (%) 31.0% at YE09 on our numbers) and settle part of its payables. Looking forward, we see little
Market capitalisation ($mn) 546
likelihood that 36.6’s retail division will be able to generate positive earnings in the next
Enterprise value ($mn) 614 couple of years due to low operating profitability and high financing costs.
Major shareholders
36.6 Investments ltd 44%
Sky‐high valuation ratios. 36.6’s current share price on MICEX assumes a market
Akada Establishment ltd 25%
capitalisation of $546mn and P/E ratios of 48.6x and 19x for 2010E and 2011E,
respectively. We consider these valuations unjustifiably high for an asset which is, in our
FINANCIALS (mn) 09E 10E 11E
view, unlikely to generate meaningful earnings in the next two years. Higher value could
Revenue 716 885 1,048
potentially be achieved in an M&A deal, but we see little reason in anyone acquiring the
EBITDA 56 82 105
company at premium valuations.
EBIT 39 63 86
Net income
‐14 11 29
EPS ‐0.1 0.1 0.3 Figure 1: Pharmacy Chain 36.6 DCF model ($mn)
CFPS 0.1 0.0 0.9 2010E 2011E 2012E 2013E 2014E
VALUATION EBIT 63 86 109 128 146
Less taxation ‐12 ‐15 ‐20 ‐24 ‐29
P/E (x) ‐38.4 48.6 19.1 Depreciation 16 17 17 17 34
P/CF (x) 40.3 ‐297.4 6.3 Less: Capex ‐15 ‐25 ‐28 ‐31 ‐34
EV/EBITDA (x) 11.0 7.5 5.8 Change in working capital ‐44 16 ‐19 ‐24 ‐31
EV/Sales (x) 0.9 0.7 0.6 Unleveraged free cash flow 7 79 59 67 86
P/BV (x) 7.6 6.6 4.9 WACC 20%
Discounted cash flow 6 56 35 33 35
RoCE (%) 11% 16% 21%
Future cash flow growth rate 3.0%
RoE (%) ‐35% 15% 29% Terminal value 535
PERFORMANCE Abs. vs.RTS Discounted terminal value 221
1 month (%) ‐12% ‐22% PV of 2014E enterprise value 386
3 month (%) ‐48% ‐59% Net debt (2010E) 67
12 month (%) Minority interest (49% of VRPH MktCap) 142
0% ‐8%
Fair equity value 177
52‐week high ($) 13 Implied valuation ratios
52‐week low ($) 2.9 P/E 15.8 6.2 4.2 3.2 2.6
Source: Bloomberg, Aton estimates EV/EBITDA 4.7 3.7 3.0 2.6 2.5
EV/Sales 0.4 0.4 0.3 0.3 0.3
FCF Yield 4% 45% 33% 38% 48%
Source: Aton estimates
Ivan Nikolaev
For professional investors only. This document has not been prepared in accordance with legal
+7 (495) 777 6677 (ext. 2646) requirements designed to promote the independence of investment research. Please refer to important
Ivan.Nikolaev@aton.ru disclosures and analyst certification at the end of this document
Valuations
Figure 2: Peer group comparison
MktCap EV P/E (x) EV/EBITDA (x) EV/Sales (x)
Company Ticker ($mn) ($mn) 2009E 2010E 2011E 2009E 2010E 2011E 2009E 2010E 2011E
Pharmacy Chain 36.6 APTK RU 546 614 neg 48.6 19.1 11.0 7.5 5.8 0.9 0.7 0.6
36.6 vs peers nm 274% 67% 51% 12% ‐6% 57% 32% 16%
Global pharmaceutical retailers
CVS CVS US 47,832 57,418 12.8 12.5 11.5 7.3 7.0 6.6 0.6 0.6 0.6
Walgreen WAG US 36,057 35,055 15.6 13.4 11.4 7.3 6.4 5.8 0.5 0.5 0.5
Average for retailers 14.2 13.0 11.4 7.3 6.7 6.2 0.5 0.5 0.5
Pharmstandard PHST LI 2,948 2,749 19.2 13.7 11.8 13.2 9.7 8.4 4.6 3.7 3.0
Veropharm VRPH RU 290 264 9.1 6.1 4.9 5.1 4.0 3.3 1.7 1.3 1.0
Veropharm vs EM average ‐33% ‐52% ‐57% ‐34% ‐46% ‐52% ‐20% ‐35% ‐42%
EM pharmaceutical producers
Egis EGIS HB 797 617 9.9 8.9 7.1 4.9 4.4 3.8 1.0 0.9 0.8
KRKA KRKG SV 3,436 3,654 14.7 13.7 12.2 8.2 7.8 7.1 2.6 2.4 2.2
Gedeon Richter RICHT HB 4,285 3,741 16.6 15.7 14.5 10.3 10.1 9.5 2.7 2.5 2.4
EM average 13.7 12.8 11.3 7.8 7.5 6.8 2.1 2.0 1.8
DM pharmaceuticals producers
Bayer BAYN GR 63,649 79,750 19.8 15.6 13.6 8.7 7.8 7.3 1.8 1.7 1.6
GSK GSK LN 106,400 123,145 11.0 10.9 10.5 7.2 7.1 6.9 2.7 2.7 2.6
Pfizer PFE US 157,275 192,485 11.0 8.9 8.6 7.7 6.0 5.7 3.9 2.8 2.9
Roche Holding RO SW 155,926 186,717 15.9 13.8 12.5 10.8 9.9 9.3 3.9 3.8 3.6
DM average 14.4 12.3 11.3 8.6 7.7 7.3 3.1 2.7 2.7
Source: Bloomberg, Aton estimates
2
Forecasts
Figure 3: Pharmacy Chain 36.6 income statement ($mn)
CAGR
2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2009‐14E
Revenue 845 1,040 716 885 1,048 1,178 1,312 1,437 15%
Retail 673 841 538 654 762 843 921 996 13%
Veropharm 139 173 159 207 257 303 356 403 20%
EMC and other 58 37 20 24 29 32 35 38 14%
COGS 593 682 442 527 618 691 765 835 14%
Gross profit 252 357 274 358 429 487 547 602 17%
SG&A 305 349 235 295 344 378 419 456 14%
Other operating income/(loss) ‐4 ‐23 0 0 0 0 0 0
EBITDA ‐31 33 56 82 105 128 148 153 22%
Retail ‐79 ‐22 4 14 23 28 32 24 42%
Veropharm 42 52 52 66 80 99 114 127 20%
EMC and other 5 2 0 1 2 2 2 2 nm
Operating Income ‐57 ‐14 39 63 86 109 128 146 30%
Financial expense 37 43 29 20 17 13 9 4
FX effect ‐4 ‐17 ‐12 8 4 2 ‐2 ‐1
Other ‐4 14 11 ‐5 ‐1 1 5 4
PBT ‐101 ‐60 9 46 72 99 122 145 73%
Tax 9 13 8 12 15 20 24 29
Income from continuing operations ‐111 ‐73 1 35 58 79 97 116
Income from discontinued operations 3 38 0 0 0 0 0 0
Minority interest 13 21 16 23 29 36 42 47
Net income ‐121 ‐56 ‐14 11 29 42 55 68 nm
Margins
Gross 29.8% 34.4% 38.3% 40.5% 41.0% 41.3% 41.7% 41.9%
EBITDA ‐3.7% 3.2% 7.8% 9.2% 10.0% 10.9% 11.3% 10.7%
Net ‐14.4% ‐5.4% ‐2.0% 1.3% 2.7% 3.6% 4.2% 4.8%
Growth rates
Revenue 60% 23% ‐31% 24% 18% 12% 11% 10%
EBITDA nm nm 69% 47% 29% 22% 15% 3%
Earnings nm nm nm ‐179% 155% 48% 29% 25%
Ratios
Stores number, eop 1,224 1,127 1,018 1,018 1,038 1,058 1,078 1,098
Effective interest rate 13% 29% 19% 13% 14% 15% 16% 6%
Effective tax rate nm nm 86% 26% 20% 20% 20% 20%
SG&A/revenue 36% 34% 33% 33% 33% 32% 32% 32%
Source: Company data, Aton estimates
3
Figure 4: Pharmacy Chain 36.6 balance sheet ($mn)
2007 2008 2009E 2010E 2011E 2012E 2013E 2014E
Assets
PPE 188 113 109 109 117 127 141 170
Goodwill 247 168 168 168 168 168 168 168
Intangible assets 12 10 10 10 10 10 10 10
Other assets 2 1 1 1 1 1 1 1
Total non‐current assets 448 292 288 288 296 306 320 349
Inventories 173 113 88 103 119 133 147 160
Receivables 105 104 90 109 127 142 158 177
Other receivables and future income 51 54 54 54 54 54 54 54
Cash 33 24 92 82 118 137 167 223
Total current assets 362 294 323 348 418 466 526 614
Total assets 810 586 612 636 714 772 845 963
Equity and liabilities
Share capital 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2
Additional paid‐in capital 120 120 197 197 197 197 197 197
FX reserve 11 1 1 1 1 1 1 1
Retained earnings (loss) ‐56 ‐112 ‐127 ‐115 ‐87 ‐44 11 79
Total equity 76 9 72 83 111 154 209 277
Minority interest 151 158 174 197 226 262 305 352
LT debt 21 27 100 100 70 40 10 10
Deferred tax liabilities 3 5 5 5 5 5 5 5
Other 2 0 0 0 0 0 0 0
Total non‐current liabilities 26 32 105 105 75 45 15 15
Payables 201 207 165 147 189 191 191 185
ST debt 271 123 50 50 50 50 50 50
Other payables 52 35 28 33 38 42 47 51
Deferred tax liabilities 30 22 17 20 23 26 29 31
Other 3 1 1 1 1 1 1 1
Total current liabilities 558 387 261 251 302 311 317 319
Total liabilities 584 419 366 356 377 355 332 333
Total liabilities and equity 810 586 611 636 714 772 845 963
Ratios
Gross debt 292 149 150 150 120 90 60 60
Net debt 259 125 58 67 2 ‐47 ‐107 ‐163
Gross debt/Equity 4 17 2 2 1 1 0 0
Gross debt/EBITDA nm 4.5 2.7 1.8 1.1 0.7 0.4 0.4
Interest cover nm 0.8 1.9 4.1 6.3 9.8 15.7 41.7
RoA ‐15.0% ‐8.1% ‐2.4% 1.8% 4.2% 5.7% 6.8% 7.6%
RoE ‐160.0% ‐133.2% ‐35.4% 14.6% 29.5% 32.0% 30.3% 28.2%
RoCE (EBIT/total assets less current liabilities) ‐22% ‐7% 11% 16% 21% 24% 24% 23%
RoCE/WACC ‐1.1 ‐0.4 0.6 0.8 1.1 1.2 1.2 1.2
Source: Company data, Aton estimates
4
Figure 5: Pharmacy Chain 36.6 cash flow statement ($mn)
2007 2008 2009E 2010E 2011E 2012E 2013E 2014E
PBT before discontinued operations ‐98 ‐22 9 46 72 99 122 145
Finance costs, net 37 43 29 20 17 13 9 4
D&A 20 21 15 16 17 17 17 5
Gain on disposal of subsidiaries 0 ‐35 0 0 0 0 0 0
Gain on partial disposal of subsidiary 0 ‐15 0 0 0 0 0 0
Impairment loss recognised on goodwill 2 23 0 0 0 0 0 0
FX loss, net 4 16 12 ‐9 ‐4 ‐2 2 1
Inventory written off 5 7 0 0 0 0 0 0
Change in allowance for doubtful and bad debts 9 1 0 0 0 0 0 0
Share‐based payment (income) expense 2 ‐1 0 0 0 0 0 0
Loss on disposal of PPE 1 0 0 0 0 0 0 0
Change in unused vacation accrual 5 ‐1 0 0 0 0 0 0
Loss on disposal of securities 1 0 0 0 0 0 0 0
Other non‐cash expenses 0 2 ‐3 1 0 0 0 0
Operating cash before changes in working capital ‐12 42 62 74 102 127 150 154
Change in working capital 21 26 ‐11 ‐44 16 ‐19 ‐24 ‐31
Operating cash after WC change 10 68 50 30 118 107 127 123
Income tax paid ‐11 ‐15 ‐8 ‐12 ‐15 ‐20 ‐24 ‐29
Finance costs paid ‐31 ‐40 ‐29 ‐20 ‐17 ‐13 ‐9 ‐4
Operating cash ‐32 13 14 ‐2 86 75 93 91
Acquisition of subsidiaries ‐88 ‐13 0 0 0 0 0 1
Purchase of PPE ‐34 ‐12 ‐11 ‐15 ‐25 ‐28 ‐31 ‐35
Proceeds from partial disposal of subsidiaries 0 35 0 0 0 0 0 0
Proceeds from disposal of subsidiaries 0 107 0 0 0 0 0 0
Other ‐6 0 0 0 0 0 0 0
Investing cash ‐127 118 ‐11 ‐15 ‐25 ‐28 ‐31 ‐34
FCF ‐159 131 2 ‐17 62 47 62 57
Financing cash flow 178 ‐133 77 0 ‐30 ‐30 ‐30 0
FX effect 1 ‐7 ‐12 8 4 2 ‐2 ‐1
Net change in cash 20 ‐9 68 ‐9 36 19 30 56
Cash bop 13 33 24 92 82 118 137 167
Cash eop 33 24 92 82 118 137 167 223
Source: Company data, Aton estimates
5
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