Share price blues: What’s next for Cipla’s institutional investors?

Institutional investors at the Uganda Securities Exchange have adopted a wait-and-see approach towards Cipla Quality Chemicals Industries Ltd following a sharp decline in both its share price and profit after tax.

The share price of the firm — which produces anti-retroviral, anti-malaria and Hepatitis B drugs — has dropped by 49 per cent since it started trading on the USE in September 2018. It fell from its initial public offering price of Ush256.5 ($0.069) per share to Ush130 ($0.035) per share at the end of July, amid low trading activity and limited earnings offered to investors.

SHARE PRICE

Besides the shrinking share price, weak full year results as at the end of March 2019 are said to have scared investors and triggered doubts about the firm’s growth forecast.

Profit after tax fell by 84.8 per cent to Ush6.79 billion ($1.79 million) as at the end of March 2019. Total sales revenues declined to Ush195.1 billion ($51.4 million) from Ush227.3 billion ($59.9 million) as at the end of March 2018, attributed to drastic declines in procurement orders made by the Global Fund, the firm’s largest donor.

Total cost of sales dropped to Ush125.5 billion ($33 million) by close of March 2019 from Ush130.9 billion ($34.5 million) as at the end of March 2018, while total administration expenses rose to Ush23.6 billion ($6.2 million) from Ush17 billion ($4.48 million) during the same period.

Cipla’s total assets rose to Ush287.6 billion ($75.8 million) by the close of March 2019, from Ush209.2 billion ($55 million) as at the end of March 2018. The drug maker declined to issue a dividend at the end of March 2019, citing high capitalisation needs faced by the business, a rare move for a newly listed company.

But company executives remain optimistic, announcing in their annual report that opening of new markets like Zambia will improve the future outlook. They also argue that some investments that ate into the company’s profit last year included a Ush12 billion ($3.3 million) pallet storage facility, distribution centre and warehouse as well as the expansion of the production line to 130 million tablets per month from 80 million are one-off expenses likely to bring better returns.

APPROVALS

The company previously secured regulatory approvals for drug exports to Kenya, Tanzania, Rwanda, South Sudan, Zimbabwe, Malawi, Mozambique, Botswana, Namibia, Ivory Coast, Sierra Leone, Ghana and Angola, but the annual report does not indicate returns or orders from those markets as yet. An annual general meeting is scheduled for August 14.

While total drug sales registered in the Zambian market have exceeded $10 million to date, the company delivered drugs worth $400,000 to Tanzania last month. Regulatory approval was also obtained from the Ethiopian government for one of the firm’s ARVs earlier this year, according to chief executive Nevin Bradford.

Around 100 million doses meant for HIV/Aids and malaria treatment were delivered to the government of Sierra Leone in July. But a wide gap seemingly persists between the sharp decline in Global Fund drug orders and the value of new procurement deals signed with African governments.

Company data shows the value of Global Fund drug orders fell from 44 per cent of total sales turnover in 2017/18 to just four per cent in 2018/19. In comparison, total sales turnover attributed to the Zambian government rose to 25 per cent in 2018/19, from 10 per cent in 2017/18.

Questions have similarly emerged over Cipla’s pending acquisition of a local rival after the company expanded its production capacity last year.

Whereas many retail investors have sought to exit the company’s counter on the USE since the beginning of this year out of despair, institutional investors have opted for a wait-and-see attitude for lack of strong commercial guidance on the company’s operations and little experience in handling corporate finance transactions in the pharmaceutical industry.

Institutional investors currently hold 90 per cent of Cipla Quality’s shares. A decision by this investor class to exit the counter would deal a blow to its share price but choosing to remain would cut Cipla’s losses on the stockmarket.

RETAIL INVESTORS

“I do not understand retail investors in this market. Why get into the market if you are not ready to take up the risk? I suspect most retail investors selling their Cipla Quality Chemicals shares are acting on misinformation,” said an investment analyst at Uganda’s National Social Security Fund who requested anonymity.

According to the analyst, at least three years should elapse before making a decision on investment in that stock.

NSSF is the largest local institutional investor in Cipla, with 269,361,386 shares equivalent to 7.38 per cent of total shareholding.

Aeko Ongodia, chief executive of Xeno, a fund manager that specialises in unit trust products, advised a cautious approach towards Cipla.

“How much new business is the company getting? Changes in earning cycles take about five years to entrench themselves and if this is the case, then we need to examine the issue before we arrive at any conclusion regarding Cipla,” argued Mr Ongodia. “Our investment window for equities covers about five years and we need to wait for the right time before we review our equity position in that company. We have therefore adopted a wait-and-see attitude towards Cipla Quality Chemicals Ltd.

Xeno invested Ush20 million ($5,356) into the Cipla Quality Chemicals Industries Ltd IPO and currently manages assets valued at more than Ush1 billion ($267,828).

Andrew Muhimbise, a retail investor said the company is faced with a double edged sword.

“If it secures three big drug supply tenders this year, its share price will certainly go up. In case it fails, the share price will drop further. Cipla Quality’s fair market valuation is closer to Ush100 ($0.03) per share compared with the IPO price of Ush256.5 ($0.069) per share,” he said.