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BAF-6-CFR Corporate Finance and Risk Management

Solution:

Investment Recommendation Report- Hikma Pharmaceuticals

Introduction

The report is prepared for providing effective recommendations to the investors for seeking their investment in Hikma Pharmaceuticals Plc. The report will focus on studying the company’s financial statements and its financial valuation to analyze the future forecasts and the financial position of the corporation. For investing in the stock of any corporation, it is necessary for the investors to analyze their position and the similar is carried out in the report.

The overall investment recommendations report will be categorized into four subsections. The first following section is the introduction part of the business and its financials, the following second one shows the methodology adopted to carry on the strategical analysis of the investment. The third section includes the empirical analysis of the business and its financials and the last one carries the overall recommendation and the conclusions that were drawn from the report.

Hikma Pharmaceuticals Plc is a global corporation operating in the market and deals with the manufacturing, research, and distribution of generic drugs. The entity has a strong market share in the market and has acquired the niche market with enhanced growth, increased profitability, and creating a solid financial position within the industry. The corporation is operating since the year 1978, established with the motive to serve the people with dedication and high-quality medicines. From the humble beginnings of North Africa and East Africa, the company has established itself as one of the leading global corporates with an earning of more than $2,341million.

Annual Report for the FY 2020

2020
Revenue by Business Area$ (Mn)%
Injectables97742%
Generics74432%
Branded61326%
Others70%
Total2341 

The key contribution of revenue of the business has flowing from the USA ($1406 mn) and the other one is the area of North and East Africa ($770 mn) as marked at the end of the FY 2020. The company is serving a huge area with quality medicines that are constantly helping the business to enhancethe investors must analyze its market approach and increase its revenue. Europe is also an emerging market for the corporation and with continual progress, the entity will hold a good market share in this area also.

Hikma is standing at the 7th rank in the generic companies operating globally. Hikma is generating a near of more than 60% of its sales in the USA. Hikma to grow its position and to attract investors introduced a huge product range of more than 690 products with its presence in more than 50 nations worldwide. The company made quality products and enhanced the value of its share in the past few years that attracted a huge number of shareholders and investors in their business. The investors of the company were highly attracted by the gross margin and the core of the operating values of the entity. The company has enhanced its valuation by computing the compensated prices by making the production in huge volume. We are a global presence making the innovation in the business and then transforming the business that is having a healthy world for the business.

The huge portfolio of the company for offsetting their prices and making the new launches that ultimately enhances the overall value of the corporation. This large and diversified portfolio has helped in the visibility of the company and making it a better brand in the market.

The business of Hikma Pharmaceuticals has strong brand awareness and due to its advanced manufacturing technologies, the business has grown on the overall platform. The quality products have enhanced the sales that in further will track the record the enhanced revenues. The per-share dividend is paid for the amount of 0.3622 GBP as marked in the year 2020. In the situation of the pandemic, the company observed an increase in its demand and the company said that: “We have made a strong focus in the USA and the capabilities on the global manufacturing on making the medicine manufacturing at the highest capacity to meet the demand due to the outbreak of the pandemic.” This increased the level of sales and also the overall revenue that results in the higher distribution of dividends and attracting the investors. The yield was implied that was not much high but at a good position as compared to the related companies of the industry.

The market rotation resulted in an increase of 10% and making the enhanced attraction and having the huge attraction of the investors and nevertheless made the recoveries of the previous losses.

Data Methodology and description

The following section will focus on delivering the methodologies that are used throughout the report recommendation, as well as helpful in analyzing and considering the included key assumptions that are considered in the valuation of the corporation Hikma Pharmaceuticals. The discounted free cash flow method and the method of relative and multiple valuations of the Hikma Pharmaceuticals Plc. These methodologies are used in the report for giving the overall financial valuation and enhancing the business values.

Discounted Free Cash Flow Method (DCF)

The crucial way to consider the valuation of the business can be made using the free cash flow method. The future expectations of the business inflows of the cash are considered in this method. The inflow of cash is computed by deducting the amount of all the expenses of the business and then deducting the value change in the WC from the obtained amount of earnings before the interest and rate of tax. The amount is then discounted by the value of the Cost of capital. The discounted rate for Hikma Plc is been considered at the rate of WACC as the capital formation of the entity includes both the debt and the equity financing. WACC is referred to as the cost of combined capital of both the debt and the equity.

The computation of the WACC can be made as:

π‘Šπ΄πΆπΆ = [(πΈπ‘ž/ πΈπ‘ž + 𝐷𝑒𝑏𝑑) * (𝐾𝑒) + (𝐷𝑒𝑏𝑑/ πΈπ‘ž + 𝐷𝑒𝑏𝑑) * (𝐾𝑑)] * (1 βˆ’ 𝑑)

The weighted average cost of capital is the combined discounted value. After making the compilation and computation of WACC, the person then further needs to compute the value of perpetual cash. The going concern concept of accounting is been considered in this computation in which the business should run in perpetuity.

The perpetual value of the cash should also be computed by the business by using the formula and then making the further study of cash value using the computed perpetual amount. The formula can be stated as follows:

𝐢𝐹= (1 + 𝑔) 𝐢𝐹𝑛 / π‘Šπ΄πΆπΆ – g

As and when the perpetual value of the cash is computed, then the discounting of the cash shall be made using the discounted value. The “n” number of years is considered. The value of “n” can vary but it should be computed up to the value of 5. Enterprise value can be computed by adding the overall present values of the cash that is computed. The value of EV is then adjusted net debt value. The overall equity value of the firm is obtained using this. By making the division of this value by the outstanding share number then the equity per share can be computed. The comparison of this computed value will be made with the actual value of the company prevailing and then analyzing whether the value of the company is undervalued or overvalued.

Multiple Analysis

It is another fundamental way of measuring the company’s value. Multiple assumptions are considered while making the value computation using the discounted cash flow method but in multiple analyses, no much assumptions are taken and this is the reason why this method is considered more reliable. The computation and calculations involved in the FCF method are complex. The calculations made using multiple simplicity and ease of computation. The price awning ratio is the primary basis of making the comparison using multiple analyses.

Multiple analysis is made using distinct Technologies the primary ones are the industry average multiples and the comparable transaction multiples. The first one is used in the report. Key comparable of the firm in the similar industry is been computed in the coming sections of the report.

The analysis among the peer groups is been carried out. Peer group refers to the group in which the companies from a similar industry operating at a similar range are considered for making the study of multiple analysis. The further step in this is involved to analyse the key drivers that have resulted in the increase of the factors that have resulted in the enhances and growth of the entity on the overall prospects.

Peer groups of Hikma Pharmaceuticals areas:

  1. Teva Pharmaceuticals Industries
  2. Aspen Pharmacare Holdings Limited
  3. Lupin Limited
  4. Dr. Reddy’s Laboratories Limited

The used multiple for making the comparative study is as follows:

  • EV/ EBITDA
  • Price/ Earnings ratio

All these multiple key factors for making the measurement of the performance of the company. These financials are having the regards of its value and making the valuation and making the overall value.

Key Assumptions

To carry on the report and have clarity in the computations and analysis, there are certain assumptions regarded in the study. The assumptions are laid down as follows:

WACC computation is as follows:

Table 1 : WACC

Cost of EquityUnited StatesThe Middle East and North AfricaEurope and the rest of the worldRemarks
Risk-Free Rate0.7%3.3%0.8%Basis 10-year Treasury Bond
Risk Premium6.0%7.3%6.0%Assumed basis average rates
Levered Beta0.570.570.57 
Size Premium0.9%0.9%0.9%Size premium based on Market Cap
Cost of Equity5.0%8.4%5.1% 
  
Cost of Debt 
Risk-Free Rate0.7%3.3%0.8% 
Spread1.0%5.0%1.5%Corporate Bonds
Cost of Debt1.7%8.3%2.3% 
Corporate Tax25%20%25% 
After-Tax Cost of Debt1.3%6.8%1.7% 
  
Debt Equity Ratio of peers14.4%14.4%14.4% 
  
Local WACC4.5%8.1%4.6% 
  
Local Sales Weight61%33%6% 
  
WACC 5.70%  
Perpetual Growth Rate 1.90%

The assumptions regarded in the WACC computation are regarded as follows- the local risk-free rates are considered as the 10-year Treasury bond regarded in every sales region of the company. The beta leverage is considered at the average of multiple 5 years periodic data leverages. The basis averages rates are assumed at 6%. Additional premium over the size is regarded at a rate of 0.9%. The considered size premium is based on the market capital.

The perpetual growth rate for making the computation of the Free cash Flow is been taken at 1.90%. The future considerations are regarded at a moderate rate and from the above trend analysis of the inflation rate. Perpetual growth rate shall be regarded based on the WC. The perpetual development model is given the hypothesis that the firm would keep on doing its memorable business and the incomes will keep on expanding at a steady rate until the end of time. This model likewise accepts that the organization will be reinvesting its normal incomes back into the business. 1.90% growth rate to be the base case for future incomes was expected after the thought and additionally express that there is no uniform rate that can be utilized to quantify development regarding Working Average Cost of Capital and distinctive provincial specialists ordinarily adopt various strategies.

The financial data is regarded from Bloomberg, the overall data up to the current Financial Year was been obtained from Bloomberg.

Depreciation

Table 3 : Depreciation Projections

Particulars ($ Mn)2015201620172018201920202021 E2022 E2023 E2024 E2025 E
Depreciation511461,241121999196100105111116
%186%750%-90%-18%-8%5%5%5%5%5%
 
Total Revenue1,4401,9501,9362,0702,2072,3412,4812,6182,7492,8732,987
Depreciation / Total Revenue4%7%64%6%4%4%4%4%4%4%4%

In regards to depreciation, the assumption is been regarded that the overall percentage of deprivation will rise by 5% because every year their growth in the number of Fixed assets is also marked at 5%. As the strategic plan of the Hikma, the forecast is been made that the CAPEX has ranged from $140 to $160 million.

Fixed Assets Table

Table 4 : Fixed Asset Projections

Particulars ($ Mn)2015201620172018201920202021 E2022 E2023 E2024 E2025 E
Net Block Value5074435149698709621,0101,0611,1141,1691,228
%-13%16%89%-10%11%5%5%5%5%5%
 
Additions to Fixed Asset13060141151152159167175184
%25%6%16%16%15%15%15%15%15%

According to the accounting policy of the company, the value of the residual leftover fixed assets will be analyzed and reviewed on the yearly basis and the adjustment in any of the values will be made. The depreciation is not charged over the assets that have not been entirely constructed in the business. The asset value is increased at the value by 5% to attain the expected level of growth by the coming FY.

CAPEX

Table 5: Capex Projections

Particulars ($ Mn)2015201620172018201920202021 E2022 E2023 E2024 E2025 E
Capex137190151139186224157160164173173
%39%-21%-8%34%20%-30%2%3%6%0%
 
Total Revenue1,4401,9501,9362,0702,2072,3412,4812,6182,7492,8732,987
Capex / Total Revenue10%10%8%7%8%10%6%6%6%6%6%

It is been assumed that -30% growth for 2021E as capex is expected between range of $ 140 Mn to $160 Mn as per company strategic plan. The amount of the CAPEX is one of the core elements that shows the declining trend.

Total Revenue

Table 6: Revenue Projections

Particulars ($ Mn)2015201620172018201920202021 E2022 E2023 E2024 E2025 E
Total Revenue1,4401,9501,9362,0702,2072,3412,4812,6182,7492,8732,987
%35%-1%7%7%6%6%6%5%5%4%

Hikma has focused on developing considerable revenues for its shareholders. Efficient returns are also demanded by the business to focus on its continual growth. Further, the assumption of the revenue growth is taken at 6% and then the following year will show a declining rate of revenue to 5% and then to 4%. As per company strategic plan there is expected launch of 154 new products as 2021 outlook.  The company will enhance its revenue that will increase its market share globally. The boost in revenues will be higher in the starting FY but then a slow made after the FY 2023.

Table 7: Change in Working Capital Projections

Particulars ($ Mn)2015201620172018201920202021 E2022 E2023 E2024 E2025 E
Accounts Receivable827699650654637662702740777812845
Change Abs-128-494-17254039373532
Change %-15%-7%1%-3%4%6%6%5%5%4%
Inventories491459488528568757606639671701729
Change Abs-32-31-51-25-180-15133323028
Change %-7%6%8%8%33%-20%6%5%5%4%
Accounts Payable & Accrued Exp276186227280382367294310325340353
Change Abs-904153102-15-7316151514
Change %-33%22%23%36%-4%-20%6%5%5%4%
Changes in Working Capital-70-121-100-144-140-3856535147
Change %73%-17%44%-3%-73%-246%-4%-6%-7%
Change in WC / Change in  Total Revenue-14%864%-75%-105%-104%-27%41%41%41%41%

The WC projections are made in the above table, the assumption considered in this is that the value of accounts receivable, inventory values, and the balance held in the accounts payable is been regarded in the line of the revenue. There is increase in Inventories in FY 2020 on account of pandemic Covid 19 resulted in higher levels hence -20% is considered for 2021 Estimate to normalize the same with some growth considering the fact Covid-19 still prevailing. The uniform growth in all the components is made in context with the growth of the revenue. The specific product risk can be mitigated in the business of Hikma because of its diversified product line and the diversified customers worldwide.

EBIT

Table 8: EBIT Projections

Particulars ($ Mn)2015201620172018201920202021 E2022 E2023 E2024 E2025 E
EBIT355258-687334542614620654687718747
% to Total Revenue25%13%-35%16%25%26%25%25%25%25%25%
 

From the above table, it can be inferred that the company is operating efficiently and carrying its operations in an optimized way, and focuses on making the cost reduction. The margins of EBIT in the coming financial years are consistent. As the revenue increase in the previous two years is marked at 6-7% and the EBIT is regarded at 25%,  as company has laid a strong focus on essential medicines continuous demand which is being used for the purpose of COVID-19 and hence ensuring supply across boarders ,so this analysis is carried forward and the assumption is taken on this basis and the margin is kept to be consistent.

The strategy of the company is based on the growth prospects of revenue and not showing the much impact of this over the EBIT.

Empirical Analysis

The valuation of the company Hikma Pharmaceuticals will be analyzed and the key finding based on these will be depicted in this section of the report. The revenue for the coming financial years will be forecasted in this section.

FCF Computation

Table 9: DFCF calculation

Particulars ($ Mn)2015201620172018201920202021 E2022 E2023 E2024 E2025 E
Total Revenue1,4401,9501,9362,0702,2072,3412,4812,6182,7492,8732,987
EBIT355258-687334542614620654687718747
(-) Tax675210184128146154161169176
% of EBIT18.9%20.2%-14.7%2.4%0.7%20.8%23.5%23.5%23.5%23.5%23.5%
(+) Depreciation511461,241121999196100105111116
(-) Capex137190151139186224157160164173173
(-) Change in Working capital-70-121-100-144-140-3856535147
FCF202232423408595493452385413436467

The free cash flow amount is computed using the amount of the total revenue and then having the EBIT as computed from the above analysis in the previous section of the report. All the values are computed on the basis on the assumptions are considered in the previous sections and then the free cash flow of the business is computed for the following five coming financial years.

Estimated Value per share and Enterprise Value Comparison

Table 10: Estimated Value per share and Enterprise Value Comparison

Particulars$
Enterprise Value                    8,496
(-) Debt and Debt Equivalent                       932
(-) Minority Interest                         13
(-) Preferred Stock                          –  
(+) Cash and Cash Equivalent                       347
Equity Value                    7,898
Average Number of Shares                       115
Value per share                    68.53FY 2020
Market Price at 31 Mar 2020 GBP                    25.27
USD to GBP rate 1.24 $ / GBP
Market Price at 31 Mar 2020 US $                    31.33119%

The value of the Hikma Pharmaceuticals was taken at the estimation of $8,496 million. After making further adjustments of the net debts and the interest of the minority as well as the financial investments, the value of the enterprise is regarded at $7898. This value is showing the 119% upside movement of the market price to the current price.

From the analysis, it can be inferred that the market valuation of Hikma Pharmaceuticals is undervalued. The computation is within the line of the revenue values. The corporate performance of the entity in financial terms can be improved only if the company makes efficient use of its recurring cash flows and making the efficient use of its capital resources in making further investments in business and its expansion.

Multiples of Hikma and peers

The below valuation shows the consideration of the study about the Hikma and the peer groups so to analyze the position of the company in the market in financial prospects.

Table 11: Peer Company comparison and Multiple Valuation

EV/EBITDAP/E
Company2018201920202021 E2022 E2018201920202021 E2022 E
Hikma Pharmaceuticals10.311.211.810.99.7718.713.219.019.3017.30
Teva Pharmaceuticals Industries8.267.616.996.776.11-6.56-10.8-2.657.846.34
Aspen Pharmacare Holdings Limited13.77.839.188.918.0719.66.381412.911.1
Lupin Limited11.513.212.118.61413355.3-99.14428.4
Dr. Reddy’s Laboratories Ltd15.614.2111714.335.324.526.632.924.7

As the collected data is considered from the market screener shows that the position of Hikma is well established from some of the companies in the peer. EV/EBITDA for the FY 2021 is regarded at 10.90, the following year 2022 has the EV/EBITDA at the rate of 9.77.

EV/EBITDA2021 E2022 E
Hikma Pharmaceuticals10.909.77
Peers12.8210.62
Deviation-15.0%-8.0%
P/E2021 E2022 E
Hikma Pharmaceuticals19.3017.30
Peers24.4117.635
Deviation-20.9%-1.9%

The following are paramount for considering the upside and the lower side risks of the business. they are as follows:

The downside risks are as follows:

  • Litigation provisions
  • Movement of foreign exchanges towards a negative side

The upside risks are as follows:

  • Movement of foreign exchanges towards a positive side
  • Efficient market acquisition

Conclusion

Hikma Pharmaceutical Plc is a leading global medicinal entity that has a diversified brand portfolio and majorly focusing on providing patients with quality medicines and giving them high-quality health. The market has huge opportunities to grow and grab a huge market share and expecting a higher growth of their operations globally. The company is operating at a good position in the market as compared to its peers and has the potential to grow with the growing market.

The valuation of the company is undervalued as compared to its valuation and then has the potential of the investors to grow and have a better investment. The report has used two multiple sources of financial data and then the method of FCF and Multiple analysis is undertaken to understand and study the market. The company has a huge market to grow and has an established brand reputation in the worldwide market.

Recommendation

The investors should make the purchase of the shares of Hikma Pharmaceuticals as the company is undervalued presently in the context of its actual valuation.

References

Ravoire., P., 2020. Hikma Pharmaceuticals Plc: A High-Quality Company Trading as a reasonable price.

Hikma Pharmaceuticals, 2020. Our Investors. Retrieved from: https://www.hikma.com/investors/2020-annual-report/

Hikma Pharmaceuticals, 2020. About Us. Retrieved from: https://www.hikma.com/about/history/

Alsawalhah, A.A., 2020. Organizational Integration and its Impact on the Effectiveness of Operational Processes (A Case Study on Hikma Pharmaceuticals). Modern Applied Science14(7).

Al-Jedaiah, M.N.S., 2021. The Effect of Strategic Leadership in Crisis Management Effectiveness: An exploratory study on Al-Hikma Pharmaceuticals Company/Jordan. Tikrit Journal of Administration and Economics Sciences17(53 part 2).

Saleh, W., Ahmed, E. and Khashman, Y., 2018. Lean Implementation in Jordanian Pharmaceutical Industry: The Case of Hikma Company. European Journal of Business and Management. 10, 13.

Himka Pharmaceuticals, 2020. Annual report, 2020.

Bataineh, M.T., The Extent of Implementation Just-in-Time System on Hikma Pharmaceutical Company (Case Study).

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