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On October 2, 2024, MeCure Industries Plc, one of Nigeria’s leading pharmaceutical companies, announced the sale of a 10% equity stake to Zrosk Investment Management Ltd.
This off-market transaction was conducted to meet the Nigerian Exchange Group’s (NGX) free float requirement for listed companies.
In a statement regarding the investment, Arjun Udani, Co-CEO of MeCure Industries Plc, expressed optimism, stating, “We are delighted to welcome Zrosk Investment Management Ltd as a key shareholder in MeCure. This investment reflects confidence in our long-term growth strategy and our commitment to delivering quality healthcare solutions to millions of Nigerians.”
Furthermore, Zrosk Investment Management’s Managing Director, Samson Esemuede, emphasized their alignment with MeCure’s vision, saying, “We see MeCure Industries as a potential dominant player in the pharmaceutical value chain on the continent. We were drawn to their commitment to domesticate pharmaceutical industrial and intellectual capacity, especially in the context of high pharmaceutical price inflation.”
Zrosk Investment Management Ltd (Zrosk IM) is an African investment management company specializing in alternative assets. The firm aims to hold significant stakes, typically between 5% and 15%—in the companies it supports.
Key details of the transaction
MeCure’s promoters sold a 10% stake to Zrosk at an off-market price of N6.95 per share.
According to Ifedamola F.O. Oluwasegun, Senior Vice President and CFO of MeCure Industries, “The sale was primarily conducted to meet the free float requirement for companies listed on the NGX Growth Board.”
He further explained that no shareholder approval was necessary, as the shares sold were the personal holdings of the promoters. However, NGX approval was obtained based on the size of the transaction.
Prior to the acquisition, according to the notes to the first half of 2024 financial statements, 96.40% of MeCure’s outstanding shares were held by three major shareholders, while only 143,982,183 shares, or 3.60%, were available as free float. With the acquisition, the free float increased to 543,982,183 shares, representing 13.60% of the total shares outstanding.
The typical advantage of a higher free float lies in improved liquidity. With the free float increasing to 13.60% after Zrosk’s acquisition, MeCure’s shares are expected to experience greater trading volumes, reducing volatility and making it easier for investors to enter and exit positions.
While MeCure’s share price saw an impressive 269% gain in 2023, it had lost over 36% of its value by the close of trading on September 30, 2024, just before the acquisition. However, following the acquisition, the share price rebounded, gaining about 21%.
The acquisition may bring hope for investors, particularly minority shareholders, as the increased free float is expected to enhance liquidity, allowing for easier entry and exit.
However, the key question remains whether MeCure’s valuation supports these positive expectations and whether Zrosk’s purchase was a sound investment beyond the discount price.
MeCure’s current valuation metrics present a mixed picture. On the one hand, its P/E ratio of 12.16 is higher than the sector average of 8.56, indicating that investors expect stronger earnings growth compared to industry peers like Pharmdeko, Neimeth, and May & Baker.
Additionally, the price-to-book (P/B) ratio of 2.69, above the sector average of 2.20, suggests that the market values MeCure’s assets more favourably than its competitors.
On the other hand, the price-to-sales (P/S) ratio of 0.93 is lower than the sector average of 1.14, indicating that investors are paying less for each unit of MeCure’s revenue compared to its peers.
In simpler terms, the market appears cautious about MeCure’s ability to efficiently convert its revenue into profit.
This is particularly necessary given the company’s latest financial performance. In the first half of 2024, MeCure experienced a 38% year-on-year revenue growth; however, profit before tax increased marginally by 0.95% to N1.338 billion, while profit after tax declined by 12% to N937 million.
Additionally, profit margins; gross profit, EBITDA, pre-tax, and post-tax margins, declined, primarily due to cost pressures that subdued revenue growth.
This margin compression contributed to the company’s relatively low return on equity (ROE) of 7.45%, despite its high leverage.
Another area of concern is MeCure’s capital structure, particularly its reliance on debt financing.
The company is highly leveraged, with its gearing ratio increasing by 37% to 280%, while its equity multiplier rose by 23% to 4.21 as of the first half of 2024.
In the first half of 2024, the company’s interest coverage ratio stood at 1.88x, marking an 18% decline compared to the previous period, signaling a reduced ability to cover its interest expenses.
While the company has not explicitly stated how it plans to use the proceeds from the sale, it is likely that the proceeds from the acquisition could be directed toward working capital needs or supporting future growth initiatives, such as expanding manufacturing capacity or reducing debt.
Overall, this acquisition can be viewed as a promising development, provided that MeCure effectively leverages the new investment to stimulate growth and enhance profitability.
Investors should closely monitor MeCure’s financial metrics in the upcoming quarters, particularly focusing on profit margins and return on equity.
Improvements in these areas would not only support Zrosk’s investment thesis but also bolster overall shareholder confidence.
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