Nigeria Corporate Analysis | Public Credit Rating

Fidson Healthcare Plc Nigeria Corporate Analysis June 2017

Financial data:

(USDm comparative)*

31/12/15 31/12/16

N/USD (avg.) 193.1 253.2

N/USD (close) 197.0 305.0

Total assets 84.6 54.3

Total debt 23.6 14.4

Total capital 32.0 21.3

Cash & equiv. 0.6 1.1

Turnover 42.5 30.2

EBITDA 9.2 5.7

NPAT 3.9 1.3

Op. cash flow 7.9 5.6

Market share# 6%

Market cap ** USD12.9m *Central Bank of Nigeria (“CBN”) exchange rate. #Management’s estimate of overall domestic

market share. **As at 08/06/2017, @ N305.6/USD.

Rating history:

Initial rating (January 2014)

Issuer Long term: BBB(NG)

Issuer Short term: A3(NG)

Rating outlook: Stable

Last rating (June 2016)

Issuer Long term: BBB(NG)

Issuer Short term: A3(NG)

Rating outlook: Stable

N2bn Bond: BBB(NG)

Rating outlook: Stable

Related methodologies/research:

Criteria for rating Corporate entities,

updated February 2017

Fidson Healthcare Plc (“Fidson” or the

Company”) rating reports (2014-2016)

Glossary of terms/ratios, February 2017

GCR contacts:

Primary Analyst:

Femi Atere

Credit Analyst

femi@globalratings.net

Committee Chairperson:

Dave King

king@globalratings.net

Analyst location: Lagos, Nigeria

Tel: +234 1 462-2545

Website: www.globalratings.com.ng

Summary rating rationale

The ratings of Fidson reflect its status as one of the leading manufacturers

in the Nigerian pharmaceutical sector, with its range of products enjoying

widespread acceptance in the market. The Company’s operations are

underpinned by a good marketing and distribution network, as well as strong

relationships with international suppliers and government agencies.

The operating environment remained volatile throughout 2016, stemming

from the devaluation of the Naira and prevalent foreign exchange (“forex”)

shortages, which raised the cost of production and raw material supplies.

This, combined with a three-month factory shut down due to relocation to

the newly completed Biotech factory, saw Fidson’s revenue fall by 6.8% to

N7.7bn in FY16. Given the relative stability in forex supply since February

2017 and the government support for locally produced medicines (which has

translated to increased demand), Fidson reported N3.4bn in revenue for the

three months ending 31 March 2017 (“1Q FY17), amounting to 78.8%

growth on an annualised basis.

Although the gross margin remained unchanged at 53% in FY16, rising

energy costs and selling and distribution expenses, continue to impact

EBITDA and operating margins. Input costs are expected to remain high in

the current year, but higher scale economies should see margins improve.

Net interest coverage weakened to 1.9x (FY15: 2.2x) in FY16. However,

this has improved to 2.1x in 1Q FY17, supported by improved earnings

during the period. Should the current growth trajectory in earnings not

sustained to full year, interest coverage is likely to witness pressure.

Except for FY13, Fidson reported working capital releases in all the years

under review. The significant release recorded in FY16 was largely driven

by trade receivables, which followed rigorous credit control measures and

increased recovery efforts.

Gross debt reduced to N4.4bn at FY16 (FY15: N4.6bn) as Fidson settled

part of its outstanding borrowings, and this saw gross gearing lower at 68%

(FY15: 74%). However, gross and net debt to EBITDA rose to 302% and

279% at FY16 due to the moderated earnings during the year. While Fidson

is gearing up for additional funding (through debt or equity) to support

production capacity, the expected increase in production volumes from the

new facilities should see gearing metrics decline by FY17.

Fidson enjoys good business relationship with its financial institutions, and

this has allowed for a steady source of funding and favourable terms, amidst

the challenging operating environment.

Government bureaucracy has prolonged the security perfection process for

the N2bn fixed rate bond. Accordingly, Global Credit Rating Company

Limited (“GCR”) will only consider any additional rating uplift provided by

the security package once the security is perfected in full.

Factors that could trigger a rating action may include

Positive change: Upward rating movement is presently limited by the tough

operating environment which has resulted in curtailed performance. However,

upward pressure would arise from the attainment of targets over the medium

term, and in particular, a significant reduction in debt profile.

Negative change: A negative rating action could emanate from sustained

decline in earnings profile, which could lead to lower than anticipated interest

coverage and deterioration in all other credit protection metrics.

Rating class Rating scale Rating Rating Outlook Expiry date Long term National BBB(NG)

Stable June 2018 Short term National A3(NG)

N2bn Secured Fixed Rate Bond National BBB(NG)

Nigeria Corporate Analysis | Public Credit Rating Page 2

Background and recent developments

Fidson is a locally owned pharmaceutical company in

Nigeria. It began as a distributor of pharmaceutical

products in 1995, but later ventured into production of its

own brand of finished medicines in 1996. The Company

has been listed on The Nigerian Stock Exchange (“NSE”)

since 2008. Its product portfolio covers the treatment of

chronic diseases, infections and malaria, as well as over

the counter (“OTC”) drugs and life style products

(including nutraceuticals). Fidson’s vision is to become

the preferred healthcare provider in the Nigerian

Pharmaceutical Industry, and this has been largely

supported by various expansion programmes to enhance

its product base and strengthen its market position. The

Company ranks among the top leading players in Nigeria.

With the successful completion of its new manufacturing

plant (Biotech factory) in 2016, Fidson completely

moved its five existing product lines to the new factory.

This was necessary to enhance operational efficiency,

achieve greater economies of scale and better manage

logistics. The Biotech factory now has six production

lines, including tablets, capsules, liquids, cream and

ointments, dry powders and intravenous fluids (i.e. large

and small volume parenterals, both of which are in high

demand in Nigeria). Fidson’s factory is one of the five

facilities shortlisted for World Health Organisation

(“WHO”) certification in Nigeria. Although the

Company still imports some of its branded products, a

larger portion are now being manufactured at the Biotech

factory in Otta, Ogun State.

Shareholding and corporate governance

Fidson’s corporate governance framework is in line with

relevant requirements of the Companies and Allied

Matters Act (“CAMA”), Securities and Exchange

Commission (“SEC”) and NSE regulations. The

Company’s board of directors meets quarterly, and its

functions include oversight of financial, operational and

compliance issues, while the day to day responsibilities

are delegated to the managing director and the

management team. The non-executive directors comprise

people from diverse backgrounds, having significant

experience in pharmaceutical, sales management and

commercial law. These directors also hold several other

directorships in other listed companies.

Table 1: Corporate governance summary

Board composition

Number of Directors 8

Non-executive directors 5

Executive directors 3

Separation of Chairman Yes

Number of board committees Four; Nomination, Remuneration, Finance and General Purpose and

Credit Control

Internal control and compliance Yes

External auditor Ernst & Young

Source: Fidson.

The board has a charter that governs its powers, functions

and responsibilities, and monitors compliance with

applicable regulations, standards and codes by means of

management reports. Fidson also subjects its operations

to periodic examinations in conformity with Good

Manufacturing Practice (“GMP”) of NAFDAC. Apart

from the Managing Director/Chief Executive Officer, Dr.

Fidelis Ayebae, no other director holds more than 5% of

the Company’s issued share capital.

Table 2: Shareholding structure Holding (%)

Dr Fidelis Ayebae 29.8

CSP Nominee 12.9

Glorious Haven Ltd. (on behalf of Fidelis Ayabae) 5.7

Stanbic IBTC Nominee 5.7

Other <5% 45.9

Total 100.0

Source: Fidson.

Operating environment and competitive position

Nigeria remains the central business hub for the West

African pharmaceutical industry, accounting for around

60% of total volume of drugs consumed within the region

annually. Although the industry remains underdeveloped

due to constraints such as counterfeit medicines, lack of

effective intellectual property protection and unstable

demand, improvements have been recorded in recent

periods. In this regard, the Federal Government of

Nigeria (“FGN”), through the federal ministry of finance,

and in collaboration with other ECOWAS governments

now imposes an import adjustment tax (up to 20%) on

imported finished pharmaceutical products. Previously,

imported finished medicines enjoys zero duty, while

essential raw and packaging materials required by local

producers attracted tariffs of between 5-20%. The FGN

(through the intervention of CBN) has also favoured

pharmaceutical sector by qualifying items such as

pharmaceutical glassware, articles of plastics, articles of

other mater, non-domestic heating/cooling equipment,

machinery, and laboratory equipment for forex from the

official CBN window. More recently, FGN also release

an executive order for all government parastatals to

support local contents in all public procurements. In line

with the National Drug Policy which stipulates that

Nigeria should aim at producing 70% of its medicines

needs, the industry players (including Fidson) are

advancing an initiative known as ‘Expedited Medicine’s

Access Programme (E-MAP)’ to improve access to

medicine and affordability; sustainability of essential

medicine needs and supply to Nigerians (especially

within the rural areas).

While recent developments portend a positive outlook for

the industry, and have helped increase the demand for

locally produced medicines, there remains substantial

challenges. These include the dependence on the

importation of active pharmaceutical ingredients (API)

and manufacturing equipment, as well as poor power

supply, infrastructure, high cost of funding and security

issues in some part of the country. In addition, even when

products are manufactured, inadequate funding in the

healthcare system (with a high reliance on foreign aid),

has limited demand. As such, locally produced drugs lack

capacity to compete favourably with those imported.

According to an industry source, domestic production

Nigeria Corporate Analysis | Public Credit Rating Page 3

capacity utilisation in the industry is estimated around

40%, while imports account for over 50% of the nation’s

drug consumption.

Presently, the industry is regulated by NAFDAC and the

Pharmaceutical Council of Nigeria (“PCN”). These

agencies are, in turn, supervised by the Federal Ministry

of Health. Due to the professionalism involve in the

production of medicines, and the quest to monitor and

ensure compliance with international standards, WHO

also plays an active role within the industry. There are

nine pharmaceutical and biotech companies listed on

NSE (including Fidson). According to management,

Fidson has an estimated 6% market share, with its growth

potential underpinned by the expanding scope of locally

manufactured products. Its position is supported by

relationships and synergies with various local and

international suppliers that should guarantee a steady

source of raw materials and consumables. Table 3 shows

the Company’s performance indicators relative to

selected peers at FY16.

Table 3:

Comparative FY16

(N’m)

Fidson Neimeth May &

Baker GSK

Revenue 7.655.0 2,001.8 8,469.4 14,384.8

EBITDA 1,454.9 469.8 1,310.0 6,719.4

Op. profit 1,227.6 381.5 820.9 6,014.2

NPBT 443.8 95.4 345.9 185.9

Total Debt 4,387.8 1,058.3 2,971.8 -

Cash 334.2 566.8 946.7 15,215.3

Net Debt 4,053.6 491.5 2,025.1 -

Equity 6,500.8 1,222.4 2,944.4 17,044.4

Key ratios (%):

Gross margin 53.0 61.2 29.9 62.3

Op. margin 16.0 19.1 9.7 41.8

Total debt: equity 67.5 86.6 100.9 n.a.

Net debt: equity 62.4 40.2 68.8 n.a.

Total debt: EBITDA 301.6 225.3 226.9 n.a.

Net debt: EBITDA 278.6 104.6 154.6 n.a.

Source: Audited Financial Statements.

Earnings diversification

Fidson’s products continue to enjoy wide market

acceptance, underpinned by focussed marketing

strategies, sales promotion and an extensive customer

base, which include registered distributors, hospitals,

pharmacies, medical laboratories and government

institutions. The Company’s top twenty customers are

principally registered distributors, accounting for about

46% of total revenue in FY16. Fidson’s premium brands

include the Astymin range of products (which according

to management, enjoys an estimated market share of

30%), Ciprotab, Arthocare Forte, Arthocare, Tribotan

cream and Tuxil range of cough syrup. Fidson introduced

about 14 new products during 2016, with an additional

10 in 1Q 2017. There is an on-going plan to roll out

additional products (including a local brand of

antibiotics) to increase market share in the coming years.

While improving on its premium brands, the Company

initiated a campaign, known as ‘Project Help’ in 2016, to

facilitate the production of volume driven medicines,

mainly targeted at the low-middle income earners.

Table 4: Revenue

diversification

2015 2016

N’m % N’m %

OTC drugs 5,283.4 64.3 4,662.4 60.9

Ethical drugs 2,774.7 33.8 2,890.7 37.8

Consumer unit 152.7 1.9 101.9 1.3

Total 8,210.8 100.0 7,655.0 100.0

Source: Fidson.

Historically, OTC products has constituted the major

source of revenue for Fidson, accounting for over 60% of

the Company’s revenue annually. Revenue from ethical

products has fluctuated over the years, largely due to

market instability. Fidson also has a consumer segment

(which produces household items) to benefit from

increased consumption patterns in Nigeria., while it

continues to offer toll manufacturing services to other

pharmaceutical companies, with agreements in place to

guide this service. About N28m was accrued from toll

manufacturing in FY16.

Although updated industry statistics are currently

unavailable, due to the large informal market, Fidson

reported a considerable share of the market in each

segment of its products, as shown in Table 4.

Table 5: Market share

per segment Key products (%)

Multivitamins Astymin range 30

Antibiotics Ciprotal, Sparflox, Peflotab,

Clavamox 14

Anti-Ulcer Gascol, Meprasil 11

Blood tonics Astyfer range, Ferobin 9

Cough Expectorant Tuxil range 9

Osteoarthritis Arthocare, Arthocare Forte 7

Anti-Malarial Arthemed, Emal 3

HIV Virex range 1

Diarrhoea Motitec 0.5

Analgesics Paracetamol 0.5

Source: Fidson

Financial performance

A five year financial synopsis, together with a three-

month management accounts ending 31 March 2017, is

reflected at the end of this report, and commentary

follows hereafter. Fidson’s financial statements were

prepared in line with CAMA, International Financial

Reporting Standards and Financial Reporting Council of

Nigeria. Its external auditors, Ernst & Young, issued an

unqualified opinion on the 2016 financial statements.

Table 6: Income

statement (N'm) FY15

FY16 (%)

Achvd.

Growth

(%) Actual Forecast

Revenue 8,210.8 7,655.0 12,600.0 60.8 (6.8)

Gross Profit 4,351.9 4,055.4 6,300.0 64.4 (6.8)

EBITDA 1,798.6 1,454.9 1,960.7 74.2 (19.1)

Depreciation (282.2) (227.3) (353.7) 64.3 (19.5)

Op. Profit 1,516.3 1,227.6 1,607.0 76.4 (19.0)

Net interest (678.3) (646.5) (519.3) 124.5 (4.7)

Other 0.0 (137.3) 0.0 n.a n.a

NPBT 838.0 443.8 1,087.7 40.8 (47.0)

Key ratios (%)

Gross margin 53.0 53.0 50.0 - -

EBITDA margin 21.9 19.0 15.6 - -

Op. margin 18.5 16.0 12.8 - -

Net int. cover (x) 2.2 1.9 3.1 - -

Nigeria Corporate Analysis | Public Credit Rating Page 4

Fidson generated consistent growth in revenue between

FY12 and FY14, on the back of rising production

volumes. However, the position reversed in FY15 and

FY16, with decline of 15.5% and 6.8% respectively. The

prevailing forex scarcity and the tough operating

condition constrained revenue growth in FY15, while the

FY16 performance was impacted by the relocation from

the old plants to the newly completed Biotech factory.

Thereafter, a recertification process was conducted by

the regulators before production could commence. As

such, the factory was shut down between March and May

2016, with no production. While operations commenced

around June 2016 and lines were operating at maximum

obtainable capacity, the Company was again faced with

the forex issue, when the Naira was devalued. As foreign

currency could not be sourced as and when needed,

Fidson ran out of raw material requirements, thus

reducing production for the year.

The Naira devaluation and forex scarcity resulted in

higher importation costs for raw materials and supplies.

Despite the rising costs, Fidson maintained its gross

margin at 53%, on the back of cost containment measures

during the period, keeping all overheads modest.

Administrative expenses remained flat around N2bn,

despite a significant growth in energy costs. However,

fuel costs spiked due to a combination of larger

generating plants in the new factory and rising diesel

price (as well as the short supply during 2016). A

200KVA diesel generator was acquired during the year.

In order to address the high energy cost on the diesel

generator, Fidson made some financial commitments for

acquisition of gas generators in 2016, and has taken

possession of same in June 2017. The gas generators are

currently being commissioned, and are expected to

reduce the energy cost by around 50% in subsequent

years. This will also allow for an increase in production

hours, as the gas plant will be able to run for six days

uninterrupted, unlike the diesel plant which usually runs

for 18 hours per day. Personnel costs reduced by 11.4%,

as some top level staff unanimously agreed for a pay cut

during the period of factory shut down. Selling and

distribution expenses grew by 12.1%, given

management’s decision to again increase spending on

advertising and promotion to create awareness for the

newly introduced products and expand market visibility.

Overall, the EBITDA margin fell to 19% in FY16, from

21.9% in the previous year. After accounting for a

depreciation and amortisation of N227.3m, Fidson

posted a lower operating income of N1.2bn (FY15:

N1.5bn) to see the operating margin lower at 16.0%

(FY15: 18.5%), but higher than FY16 forecast of 12.8%.

Fidson has reported consistently high finance costs over

the review period, as expansion has largely been funded

by debt. In this regard, the gross interest charge remained

high at N690.8m in FY16 (FY15: N717m), with interest

on bank loans accounting for the bulk. After recognising

a modest interest income, net interest charges registered

at N647m (FY15: N678m). In view of the moderated

operating income, the net interest coverage ratio fell to

1.9x (FY15: 2.2x), from a review period high of 3.4x in

FY13. Fidson reported an impairment charge on trade

debtors of N137.3m, further reducing NPBT to N443.8m

in FY16 (FY15: N838m), and below the FY16 forecast

of N1.1bn. With a tax charge of N127m (FY15: N93.7m),

NPAT registered at N316.8m in FY16 (FY15: N744.4m).

Cash flows

Cash generated by operations has consistently reflected

EBITDA trends, and grown in line with the Company’s

expansion over the years. After peaking at N1.9bn in

FY14, it declined to N1.8bn and N1.4bn in FY15 and

FY16 respectively, due to weaker earnings. Except for

FY13 (where an absorption of N365m was reported as a

result of higher year-end balance of finished goods and

trade receivables), Fidson reported working capital

releases in all the years under review. While, the working

capital releases reported in FY14 and FY15 were largely

driven by factors unrelated to normal trading activities

(which include accrued expenses and payables due to

other shareholders of its liquidated associate - Fidson

Product Limited (“FPL”)), the significant release

recorded in FY16 was largely driven by reduction in

trade receivables.

Table 7: Movement in working

capital

FY14 FY15 FY16

N’m N’m N’m

Inventory 279.7 435.8 (388.0)

Trade receivables (1,816.3) (614.0) 1,270.4

Trade payables 110.4 171.3 (447.0)

Operating working capital (1,426.2) (6.8) 435.3

Other receivables 704.8 54.3 (48.3)

Accrued exp. and other payables 1,322.0 261.3 463.9

Prepayment - 105.2 (106.4)

Government grants 39.6 - 124.8

Deferred revenue - 7.0 -

Gratuity and lease (191.0) (14.1) -

Non-operating working capital 1,875.3 413.6 434.0

Movement in WC 449.1 406.8 869.4

Source: Fidson.

The improved debtor’s collections followed rigorous

credit control measures and increased recovery efforts

during the year, which accounted for N1.3bn reduction in

trade debtors. Consequently, the average collection

period fell to 104 days, from a high of 145 days in FY15.

Previously, Fidson allowed credits up to 90 days for

distributors and 120 days for health institutions, taking

cognisance of the tough operating conditions. However,

distributors now enjoy a maximum of 45 days, while

health institutions, government agencies and hospitals

-

6

12

18

24

30

36

42

48

54

60

-

500

1,000

1,500

2,000

2012 2013 2014 2015 2016

%N'm Operating performance

EBITDA NPBT

Gross margin (RHS) Op. profit margin (RHS)

Nigeria Corporate Analysis | Public Credit Rating Page 5

still enjoy up to 120 days due to their nature of

operations.

Operating working capital was moderated by increases to

inventory and a reduction in trade payables. Fidson

utilised expensive foreign currency to import its raw

material requirements, especially towards the end of the

year to avoid stock out. On the other hand, suppliers were

promptly settled, as credit terms were reduced to 60 days,

from previous 90 to 120 days term (though a few

suppliers still allow up to 90 days).

Overall Fidson reported cash flow from operations of

N1.4bn, slightly down from the N1.5bn in FY15, but well

above historical levels. The strong cash flow from

operations was sufficient to meet the reduced capex

costs. Fidson has expended about N9bn on its capacity

expansion programs in the last seven years. Following

the completion of the Biotech factory, capex declined to

N677m at FY16, from a high of N2bn in FY13. Fidson

invested additional N692m in the bond repayment

reserve account and product licences, which was partly

offset by N920m inflow from the liquidation of some

investments and proceeds from sale of some property and

financial assets. Overall, the Company recorded

significant reduction in net debt as per the cash flow

statement, driven by loan settlements and an amount sets aside, and ring-fenced for repayment of bond.

Funding Profile

Given the business’ expansion, Fidson’s asset base

doubled from N7.9bn at FY10 to N15.8bn at FY14. Since

then, the value has remained relatively unchanged at

N16.6bn at FY15 and FY16. At FY16, fixed assets

accounted for 74% of assets, compared to 69% at FY15,

reflecting Fidson’s shift from the sale and marketing of

imported medicines to the manufacture of drugs and

other medical supplies. Other assets, comprising largely

of inventories and receivables, registered a lower

combined 20% (FY15: 27%), in view of the sizeable

decline in trade debtors, which led to growth in cash and

cash equivalent to N334m (up from N122m at FY15).

Investments and advances totalled N409m and N583m at

FY16 and 1Q 2017 respectively, comprising mainly the

reserve fund account, which is held in liquid assets to

service interest and principal repayment obligations on

the bond (as per the trust deed).

Table 8: Funding

profile (N’m) FY15

FY16 1Q 2017

Actual

FY17

Forecast Actual Forecast

Total Debt 4,645.3 4,387.8 4,438.2 4,613.5 3,508.7

Cash (122.4) (334.2) (92.5) (132.6) (287.7)

Net Debt 4,522.9 4,053.6 4,346.2 4,481.0 3,221.0

Equity 6,312.8 6,500.8 6,657.2 6,592.1 7,432.0

Key ratios (%):

Total debt: equity 73.6 67.5 66.7 70.0 47.2

Net debt: equity 71.6 62.4 65.3 68.0 43.3

Total debt: EBITDA* 258.3 301.6 226.4 201.3 141.3

Net debt: EBITDA* 251.5 278.6 221.7 195.5 129.7

Cash: ST debt (x) 0.1 0.2 0.0 0.1 0.1

*1Q 2017 EBITDA is annualised. Source: Fidson.

In view of the expansion programme, gross debt doubled

to N4.6bn at FY15, from N2.2bn at FY11. This declined

marginally to N4.4bn at FY16, as Fidson settled some

outstanding debt, but has since risen to N4.6bn at 1Q

FY17, with additional short term credit facilities.

Nevertheless, the debt profile is considered to be

adequately matched with assets being funded, with the

long term tenor accounting for 55% of gross debt at

FY16. The main outstanding credit facilities at FY16 (as

shown in Table 8) are as follows:

Access Bank loan is a N525m CBN intervention loan

granted to Fidson in FY10 for 15 years. The loan was

granted for the production of drugs and pharmaceutical

products.

The Bank of Industry (“BOI”) loan comprises: (i)

N1.3bn loan granted at 10% in 2011 for 6 years, with a

moratorium of 2 years and 9 months. The loan was

granted to support the Company’s capex projects

(including the Biotech plant); (ii) N600m additional

loan granted in FFY16 at 12.5% for 3 years for working

capital financing. The loan has a moratorium of 1 year.

Fidelity loan represents debt granted to Fidson Product

Limited (“FPL”) in 2010 for 15 years, and taken up by

Fidson after the liquidation of FPL in October 2014.

The Company utilises various credit facilities

(overdraft, trade finance and short-term loans) from a

number of commercial banks.

A small amount of commercial Paper, with maturities

of 90 days with a roll over option.

A N1.5bn fixed rate bond (of a N2bn programme)

raised by Fidson in 2014 to finance the construction of

Biotech plant, as well as working capital requirements

during the period. An update on the bond is provided

later in this report.

Table 9:

Bank/Credit

source

Loan type Interest

rate (%) FY16 (N'm) Maturity

Access Bank CBN intv. fund 7% 178.0 2021

Bank of Industry Term loan 10/12.5% 1,354.6 2020

Bond Bond 15.5% 1,466.5 2019

Fidelity Term loan 7% 76.5 2020

Various banks Overdraft 18-20% 365.3 2017

ST loans Various 20% 439.3 2017

Non-bank lenders CP 20.5% 65.0 2017

Finance lease Lease 22% 442.6

Total 4,387.8

Debt registered at N4.6bn at 1Q F17. Source: Fidson.

Although the debt profile is well spaced, Fidson

evidences a high maturity in 2019 upon the redemption

of the bond. Nevertheless, there remains ample time to

consider refinancing or redemption options beforehand.

Shareholders’ equity hovered around N5.2bn between

FY10 and FY13, before rising by 10% to N5.7bn at

FY14, and later to N6.5bn at FY16, supported by

growing retained earnings. The higher equity combined

with slightly lower debt, underpinned a reduction in gross

gearing to 67% at FY16 (FY15: 74%), from a high of

84% at FY14, and net gearing fell to 62%, from 72% at

FY15, supported by the higher cash balance. However,

gross and net debt to EBITDA rose to 302% and 279% at

FY16 (FY15: 258% and 252%) respectively, due to

relatively lower earnings. With net debt slightly higher at

Nigeria Corporate Analysis | Public Credit Rating Page 6

1Q FY17, gearing metrics have also risen, but only

marginally.

Update on the N2bn Secured Fixed Rate Bond

Fidson raised N2bn from the capital market in November

2014, through the issuance of bonds, with a 5 year tenor

(maturity in November 2019). The bond was issued at an

interest rate of 15.5% per annum, payable semi-annually

in arrears (in May and November each year), while the

principal will be redeemed by eight equal semi-annual

instalments, following the expiration of a 12-month

moratorium period. Proceeds from bond have been

deployed for debt refinancing and working capital. The

bond is secured by an all asset debenture managed by

ALM Consulting (the Bond Trustees), covering the

mortgages on Fidson’s five properties (four in Ogun

State, one in Lagos State) as well as other fixed assets.

GCR has reviewed the Trustees report dated May 10,

2017, regarding the bond performance. Principal

repayment commenced in May 2016 after the expiration

of the 12 months moratorium. So far, the Company had

paid three part-principal repayments, and the fourth part-

principal repayment will be due on 7 November 2017.

Funds in the transaction accounts have been invested in

short term money market instruments per the Trust Deed.

According to the Trustees’ investment report, the

minimum reserve account, perfection reserve and

payment accounts had balances of N317,767.98,

N13,769.27, and N43,824.52 respectively as at 10 May

2017. In addition, the transaction accounts had running

investments totalling N253.9m. The applicable bank

statements and investment account statements at 10 May

2017 were provided to GCR. Trustees also reported that

there had been no breach of covenants or negative

pledges.

The Trust Deed required the stamping of the security

documents and all applicable registrations to be

completed within 6 months from the Closing Date.

However, while Fidson was able to successfully file the

deed of variation with the Corporate Affairs Commission

noting the interest of the bondholders in the security

package for Lagos State and Ogun State, the registration

of the Supplemental Mortgage Trust Deed for Ogun State

property (which comprises the bulk of assets) with Ogun

State Lands Bureau is yet to be completed. The inability

to complete the process has been attributed to

bureaucratic delays at the Lands Registry and other

government agencies. Until this process is completed, the

N2bn secured fixed rate bond will be accorded an

unsecured credit rating in line with the corporate credit

rating of Fidson. However, calculations based on the

most recent asset valuations indicate that recovery

prospects can be expected to be ‘Excellent’. This could

result in a rating uplift once the security package is

perfected in full.

Outlook and forecasts

In view of the increased demand from public health

institutions and major distributors, revenue increased by

an annualised 79% to N3.4bn in 1Q FY17, representing

24% of the full year budget. However, the heightened

forex shortage witnessed, particularly in January 2017,

caused a sharp rise in cost of sales. As such, Fidson

reported a lower gross margin of 52%, though gross

profit improved in absolute value. Selling and

distribution expenses continue to expand in line with the

Company’s brand awareness strategy, and administrative

expenses grew in view of the rising energy costs. As

such, the EBITDA margin dropped by 210 basis points

to register at 16.7%, while operating margin fell to 13.2%

(FY16: 16.0%). In view of the increased utilisation of

expensive short-term credit facilities, net finance costs

rose to N214m, against N143m in 1Q FY16. However,

gross and net interest coverage rose to 2.1x, supported by

the improved operating income. Consequently, NPBT

rose by an annualised 113% to N236.7m in 1Q FY17.

Table 10:

Interim

performance

(N’m)

1Q 2017

FY17 % Ann.

Forecast Achieved Growth

(%)

Revenue 3,421.7 14,247.2 24.0 78.8

Gross profit 1,764.3 6,981.1 25.3 74.0

EBITDA 573.1 2,909.4 19.7 57.6

Depreciation (122.3) (417.0) 29.3 115.3

Op. Profit 450.7 2,492.4 18.1 46.9

Net interest (214.0) (669.2) 32.0 32.4

Other - - - n.a

NPBT 236.7 1,823.2 13.0 113.4

Key Ratios (%): Gross margin 51.6 49.0 - -

EBITDA margin 16.7 20.4 - -

Op. Margin 13.2 17.5 - -

Net int. cover (x) 2.1 3.7 - -

Based on the FY17 projections, which has anticipated

growth on sale volume, revenue is estimated to double

the FY16 position to N14.2bn. The direct cost of raw

materials and other supplies is expected to rise, but other

cost savings should see EBITDA margin around 20%.

According to management, Fidson requires about

USD20m for working capital and USD1.7bn for Capex.

The capex will be spent on acquisition of injectables

machines that share common utilities and ancillary

equipment with the infusion line, as well as automation

of the existing lines, particularly the tablet and capsule

lines. The tablet line’s capacity utilisation is currently at

20%, and significant number of the products being

introduced in the essential medicines category are tablets.

Thus, additional machines are needed to boost

production. For other production lines, Fidson has

reached maximum capacity utilisation, and there is need

to acquire additional facilities to boost capacity. From

time to time, Fidson engages other players with low

capacity utilisation in a contract agreement (at a cost) to

meet demands for its liquid products. Given the various

funding requirements, Fidson is negotiating with the BOI

and CBN to secure new low-cost credit facilities, which

will replace the expensive funding from some of its

bankers. Also, Fidson plans to sell off its old factory

buildings, and use the proceeds to reduce debt. Overall,

gross debt is anticipated to reduce to N3.5bn at FY17,

and gradually to N2bn by FY19. If funds are not

Nigeria Corporate Analysis | Public Credit Rating Page 7

forthcoming as expected, the Company may consider

equity funding (particularly for Capex funding).

Conclusion

Since the shift from sales and marketing of drugs to

manufacturing, Fidson has evidenced growth in market

share, and benefitted from rising scale economies, which

has seen it become one of the largest pharmaceutical

supplier in Nigeria. With the successful completion of the

infusion plant, and the anticipated expansion in capacity

utilisation, local production is expected to increase to

about 60% content in the medium term (40% in the

current year), from its current 35%, translating to

improved market share. According to management,

Fidson will continue to focus on brand building and

enhancing market visibility, as well as continuous

research and exploration on new products to further

diversify its earnings base.

The increasingly challenging operating environment will

continue to affect businesses across the board.

Particularly for the pharmaceutical sector, financial

performances will be impacted by the volatility in forex

supply, amidst other factors, due to the import-dependent

nature of the sector. However, Fidson has benefitted from

its strong relationship with all its suppliers and this has

guaranteed a steady source of raw materials and

consumables amidst the challenges. While gearing

metrics have reduced somewhat, the low net interest

coverage ratio remain a concern. Moreover, given the

increased demand for locally made medicines, the

industry will continue to face pressure to fund the

acquisition of the necessary plant and equipment to

increase capacity. Considering the present industry

environment, factors that will shape Fidson’s

performance (particularly in the current year), include its

ability to further diversify its product offering, to source

the required funding, and expand and maintain optimum

production capacity, as well as streamlining cost.

Nigeria Corporate Analysis | Public Credit Rating Page 8

Fidson Healthcare Plc (Naira in Millions except as Noted)

Year end – 31 December

Statement of Comprehensive Income 2012 2013 2014 2015 2016 1Q 2017

Revenue 7,168.9 9,235.1 9,719.2 8,210.8 7,655.0 3,421.7 EBITDA 1,044.7 1,581.1 1,698.5 1,798.6 1,454.9 573.1 Depreciation and amortisation (190.3) (213.1) (266.8) (282.2) (227.3) (122.3) Operating income 854.5 1,368.0 1,431.7 1,516.3 1,227.6 450.7 Net finance charges (314.4) (402.7) (549.7) (678.3) (646.5) (214.0) Share of loss of associate 0.0 (715.7) (11.2) 0.0 0.0 0.0 Other operating income/(expense) 0.0 0.0 0.0 0.0 (137.3) 0.0 NPBT 540.1 249.6 870.8 838.0 443.8 236.7 Taxation charge (333.2) (94.6) (239.0) (93.7) (127.0) (75.8) Profit from continuing operations 206.9 155.0 631.8 744.4 316.8 161.0 Other comprehensive income (18.8) 41.9 38.1 39.2 27.7 0.0 Total comprehensive income 188.1 196.9 669.9 783.5 344.4 161.0

Statement of cash flows

Cash generated by operations 1,044.7 1,823.1 1,949.4 1,801.2 1,392.3 594.2 Utilised to increase working capital 555.3 (364.8) 449.1 406.8 869.4 (377.8) Net finance charges/Net interest paid (314.4) (412.7) (559.3) (678.3) (646.5) (214.0) Taxation paid (263.1) (154.6) (70.0) 0.0 (202.6) (55.0) Cash flow from operations 1,022.5 891.0 1,769.3 1,529.7 1,412.6 (52.6) Maintenance capex‡ (190.3) (213.1) (266.8) (258.9) (210.4) (122.3) Discretionary cash flow from operations 832.3 677.9 1,502.5 1,270.7 1,202.2 (174.9) Dividends paid (150.0) (180.0) (150.0) (177.8) (60.1) 0.0 Retained cash flow 682.3 497.9 1,352.5 1,092.9 1,142.1 (174.9) Net expansionary capex (1,705.4) (1,142.6) (985.7) (515.0) (467.0) (22.8) Investments and other 460.0 (42.9) (198.9) (639.3) (789.1) (220.0) Proceeds on sale of assets/investments 9.0 243.6 133.3 401.8 920.3 0.0

Shares issued 0.0 0.0 0.0 0.0 0.0 0.0 Cash movement: (increase)/decrease (222.2) 106.4 (67.1) 81.8 (211.9) 201.7 Borrowings: increase/(decrease) 776.3 337.6 (234.0) (422.2) (594.4) 216.0 Net increase/(decrease) in debt 554.1 444.0 (301.1) (340.4) (806.3) 417.6

Statement of financial position

Ordinary shareholders interest* 5,226.2 5,242.1 5,742.8 6,312.8 6,500.8 6,592.1 Outside shareholders interest 0.0 0.0 0.0 0.0 0.0 0.0 Pref shares and conv debentures 0.0 0.0 0.0 0.0 0.0 0.0 Total shareholders' interest 5,226.2 5,242.1 5,742.8 6,312.8 6,500.8 6,592.1 Current debt 1,375.1 2,201.8 1,851.7 1,883.4 1,956.3 2,182.1 Non-current debt 1,638.6 1,779.1 2,992.2 2,761.9 2,431.5 2,431.5 Total interest-bearing debt 3,013.7 3,980.9 4,843.9 4,645.3 4,387.8 4,613.5 Interest-free liabilities 2,538.8 3,016.9 5,163.3 5,701.2 5,685.9 5,179.6 Total liabilities 10,778.7 12,239.8 15,750.1 16,659.3 16,574.5 16,385.2 Property, Plant and Equipment 4,679.4 7,043.5 10,790.8 11,501.3 12,206.2 12,189.2 Investments and other non-current assets 1,328.9 426.7 304.9 546.2 409.5 583.1 Cash and cash equivalent 243.4 137.0 204.2 122.4 334.2 132.6 Other current assets 4,527.1 4,632.7 4,450.3 4,489.4 3,624.5 3,480.4 Total assets 10,778.7 12,239.8 15,750.1 16,659.3 16,574.5 16,385.2

Ratios

Cash flow: Operating cash flow : total debt (%) 33.9 22.4 36.5 32.9 32.2 neg Discretionary cash flow : net debt (%) 30.0 17.6 32.4 27.6 29.2 neg Profitability: Revenue growth (%) 50.9 28.8 5.2 (15.5) (6.8) 78.8 Gross margin (%) 56.8 55.2 55.9 53.0 53.0 51.6 EBITDA : revenues (%) 14.6 17.1 17.5 21.9 19.0 16.7 Operating profit margin (%) 11.9 14.8 14.7 18.5 16.0 13.2 EBITDA : average total assets (%) 10.5 14.0 12.3 11.2 8.9 14.1 Return on equity (%) 4.0 3.0 1.9 2.1 0.8 1.6 Coverage: Operating income : gross interest (x) 2.7 3.4 2.6 2.1 1.8 2.1 Operating income : net interest (x) 2.7 3.4 2.6 2.2 1.9 2.1 Activity and liquidity: Trading assets turnover (x) 3.3 6.4 4.8 3.2 3.3 1.5 Days receivable outstanding (days) 47.5 47.7 81.7 145.4 104.4 13.4 Current ratio (:1) 1.7 1.2 0.8 0.7 0.6 0.6 Capitalisation: Net debt : equity (%) 53.0 73.3 80.8 71.6 62.4 68.0 Total debt : equity (%) 57.7 75.9 84.3 73.6 67.5 70.0 Total debt : EBITDA (%) 288.5 251.8 285.2 258.3 301.6 201.3 Net debt : EBITDA (%) 265.2 243.1 273.2 251.5 278.6 195.5

‡ Depreciation used as a proxy for maintenance capex. *Net of intangible assets.

Nigeria Corporate Analysis | Public Credit Rating Page 9

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