Friday 25 April 2014

Analysis of Pharmstandard

A Russian pharmaceutical company

Company: Pharmstandard

Business: A Russian pharmaceutical company. They are producing and selling around 250 different pharmaceutical products. They have eight production lines of which six are already complying to the EU GMP regulations and the remaining two will be converted before the end of 2014. They already have a foot in Cyprus (EU) which means they have the possibility to step into Europe.

Active: They are currently focused on Russia, Ukraine and have, as mentioned, one foot in Cyprus.

P/E: 4.7

contrarian values of P/E, P/B, ROE as well as dividend

Comment: Today they actually arrive with the report for 2013 so if you find this analysis of interest then you should go to the homepage and check out how they did in 2013 before even starting to consider an investment.

The P/E of Pharmstandard is excellent with 4.7 and the P/B is so, so with 1.2 which gives us in the end a clear go signal from Graham. The earnings to sales are also great with 19% and the ROE is very good indeed with 26%! With a book to debt ratio of 2.7 they have built up plenty of buffer for surviving a couple of tough years (but I would have preferred them to start paying dividends!). They have in the last five years had a yearly growth of 29%! That is amazing! This then gives us a motivated P/E of (I am cautious again) 30 to 50 which means they are strongly undervalued by the market today. They pay no dividends which I really do not like!

Conclusion: Graham says yes and I must say that I get very tempted by Pharmstandard. The P/E, P/B and ROE are all excellent and that growth they have shown in the last couple of years is just spectacular! I could consider stepping in as a shareholder in Pharmstandard but would then look a bit more deeply into their potential of actually being able to enter the European market. Because if I would think that they would fail that then the company would be less interesting to me especially without the dividend payments.

If this analysis is outdated then you can request a new one.


Anonymous said...

Thnx for the post. A question:

1) How can one be sure that this Russian company will ever pay dividents? There are reports of heavy corruption in Russia, and the companys reported values can stay on paper for years until company is butchered.

Ps. Kan man handla aktier som du granskar, så som tyska österrikiska ryska tjeckiska spanska etc, från Sverige?

Fredrik von Oberhausen said...

Woops... my fat finger seem to have pushed the publishing button too early on this article...

No there is no guarantee that they will pay dividend. I just hoped that they will one day do so just like Apple started to do after many years without paying a dime.

To me it seems as if several of the banks in Europe have managed to do exactly the same thing with their books and reporting so no matter what the regulation says and how little or how largely corrupt a country is there will never be a guarantee on such matters and it is simply part of the risk that you take when stepping in as a shareholder into any company that you do not run yourself.
It is enough that a new CEO comes to one of your companies that you have shares in and the company culture can over night be changed from honest and straight forward to corruption being the standard of business.

I am sure that you can buy all the stocks also in Sweden. The problem will be more how much you have to pay for doing so.
All the companies that I own that are not registered in Germany... So Intel, Cez, ABF, BP, Enel and Kernel I have still managed to buy on the German stock exchange so maybe you can also try to do that from Sweden but I do not know if that will work. Sorry that I can not give you a better reply.

Fredrik von Oberhausen said...

I got a very important reply on Google+ that I just must repost to all of you!

"Aleksandr Kairov

Pharmstandard is one of the best companies on Russian market to invest in. At least it was in Q3-Q4 2013, due to a low price per share :)

However there are some important points missed in your summary table/ analysis:
- Pharmstandard made a carve out of its OTC business in Q4 2013 "OTCPHARM" (revenues of c.14B RUR in 2013FY) which should be listed on MICEX in May 2014. Actual price per share reflects Pharmstandard without OTC business.
- 2013 FY IFRS statement reports Pharmstandard + OTCPHARM numbers
- Shareholders of Pharmstandard have received 4 shares of OTCPHARM per every share of Pharmstandard
- Price per share of OTCPHARM should be around 400 RUR once listed

Considering the above points, I would say that actual price per share of Pharmstandard (perimeter before carve out) is around 2700 RUR. Not bad considering that it was 1400 RUR in Q2-Q3 2013.

Based on my own financial model and analysis, I think if market conditions will be good we might see price per share of 2400 RUR and of 600 RUR per Pharmstandard and OTCPHARM respectively in 2014-2015. That means 2400+600*4= 4800 RUR per share of Pharmstandard before carve out perimeter.

Aleksandr Kairov"

Thank you Aleksandr for this very important information!