Hikma Pharmaceuticals PLC

FTSE 100-listed Hikma Pharmaceuticals PLC (LON: HIK) is a FTSE 100 listed Pharmaceuticals and Biotechnology Company that manufactures a portfolio of branded and non-branded generic medicines.

On 24 February 2022, it expects to release the FY21 results for the year ended 31 December 2021.

Investment Rationale – BUY at GBX 2,080.00

• New Launch: On 10 January 2022, Hikma launched a new outsourced sterile compounding business – 503B, building on its strong relationship with US hospitals.
• Acquisition: The acquisition of Custopharm will complement the Company’s injectable product portfolio by adding 14 approved products and enhanced R&D capabilities.
• Health Balance Sheet: At the end of H1 FY21, Hikma maintained low leverage with net debt to core EBITDA of 0.9x (31 December 2020: 0.9x).
• Technical Indicator: From a technical standpoint, 14-day RSI (~29.46) is in the oversold territory, while the stock price is hovering close to the lower standard deviation of the Bollinger Bands.
• Undervalued Multiples with Higher Dividend Yield: In terms of forward 12-month – EV/Sales EV/EBITDA, Price/Earnings, Price/Cash Flow and Price/Book valuation multiples are undervalued against the industry median of the pharmaceuticals industry. Moreover, its dividend yield is higher than the industry median.

Key Risks

• US Inflation: The U.S. consumer price inflation had touched 40 years high during December 2021. Thus, it may cause a sooner-than-expected interest rate hike.
• Principal Risks: The commercial viability of its products can change significantly with political action, economic factors, regulatory interventions, societal pressures, and changes to participants in the industry's value chain.

Trading Statement (as on 04 November 2021)

• Strong Trading Momentum: Hikma continued to perform strongly and set to achieve another year of financial growth.
• Operational Achievement: It launched new specialty products, established new partnerships, expanded portfolio and pipeline for resilient commercial and operational capabilities.

One Year Share Price Chart

 (Data Source: REFINITIV, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative)

Conclusion

Hikma has reiterated the full-year guidance and expects revenue growth for all three divisions – Injectables (revenue growth in the mid-single digits), Generics (expect revenue to be in the range of US$810 million to US$830 million) and Branded (expect revenue to grow in the mid-single digits in constant currency).

In a nutshell, the Company has a robust pipeline of new medicines and a clear strategy to ensure a bright outlook and deliver increased value for its stakeholders. The stock made a 52-week High and Low of GBX 2,703.00 and GBX 2,067.00, respectively.

Based on the Custopharm’s acquisition, strong first half performance, continued revenue growth in all three businesses, reiterated guidance, broad and growing portfolio, we have given a “BUY” recommendation on Hikma Pharmaceuticals PLC at the closing price of GBX 2,080.00 (as on 12 January 2022), with lower double-digit upside potential based on 16.97x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

RHI Magnesita NV

RHI Magnesita NV (LON: RHIM) is a FTSE All-Share listed entity that supplies refractory products, systems, and solutions for high-temperature processes.

Investment Rationale – SPECULATIVE BUY at GBX 3,544.00

• Debt Financing Update: On 2 December 2021, RHI Magnesita agreed a new debt financing for €400 million, comprising a new €250 million ESG-linked Schuldschein and a new €150 million ESG-linked Bilateral Facility. Therefore, RHIM has additional liquidity and financial flexibility, following the debt financing update.
• Acquisition of SÖRMAŞ: RHIM agreed to acquire an 85.22% stake in SÖRMAŞ, for a consideration of €38.8 million in cash.
• Technical Indicator: From a technical standpoint, the MACD line has given a bullish crossover against the signal line, supporting a positive price potential.
• Valuation Multiples: On a forward 12-month basis, key valuation multiples of RHIM (EV/EBITDA, and Price/Earnings) are lower against the median of the Basic Materials industry.

Key Risks

• Subdued Factory Activity: British factories are witnessing sluggish growth amid soaring costs as they are struggling with supply bottlenecks.
• Increased finance costs: Following the increase in net debt, its leverage (Net debt to adjusted LTM EBITDA) has increased from 1.5x in H1 FY20 to 2.2x in H1 FY21.

Q3 FY21 Trading Update (for the three-month period to 30 September 2021, as on 19 October 2021)

• Strong Demand: RHI Magnesita experienced a solid demand for both the Steel and Industrial businesses in Q3 FY21, and thus, it has a strong order book visibility extending into Q1 FY22.
• Financial position: Due to lower profitability in Q3 FY21, and increased inventory levels to tackle supply chain challenges might keep the leverage (Net debt to EBITDA) around 2.0x at the end of FY21.

Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative)

Conclusion

Driven by higher prices, the Group witnessed improved earnings momentum in September 2021. Subsequently, RHIM is on track to achieve €310 million in Adjusted EBITA in FY21, supported by price increase. Furthermore, it has a strong order book visibility into FY22. Also, the expected cost-saving initiatives shall also support the H2 FY21 results. The stock made a 52-week High and Low of GBX 4,762.00 and GBX 2,872.00, respectively.

Based on the positive trading momentum, revenue growth, increased shareholder returns, supported by the valuation conducted above, we have given a “SPECULATIVE BUY” recommendation on RHI Magnesita NV at the closing market price of GBX 3,544.00 (as on 12 January 2022), with lower double-digit upside potential based on 11.60x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

*All forecasted figures and Industry Information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

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