STOCKWATCH - Erste adds Slovenia's Krka to CEE/Turkey top 10 stock picks for Q4

The research outfit's 10 top equity picks represent its best investment short- to mid-term ideas.

Delivering a first-half net profit of 90.1 million euro ($116.1 million) on sales of 565.3 million euro (up 6.9% year-on-year), Krka reassured investors that it is well on track to meet or even surpass its 2012 guidance of sales growth of 6.0% on the year to 1.1 billion euro and net profit of 170 million euro, Erste Group Research said in a statement.

"Although the pricing pressures in the CEE region continue to hurt the company, this is to be offset by dynamically growing Russia/CIS. Krka’s top line growth is thus set to remain solid. The own Russian manufacturing base (with further investment worth 135 million euro planned to be finished next year) and an excellent sales network bode well for retaining Krka’s status as the second largest among the CEE-based Russian players," the statement said.

The Erste analysts said Krka’s strong innovative edge (high share of new products in its sales mix) should provide an antidote to pricing pressures and help the company keep its profitability margins above its peers’. "Krka’s high-quality R&D pipeline, rich in generics coming off-patent, is fueling its success in Western markets."

“Should the market conditions improve, management is committed to pursuing next steps in the Warsaw listing, i.e. offering treasury shares to investors, including Polish pension funds,” the statement said.

“Historically, the stock used to be traded at a premium to its CEE-based pharma peers. Not only has this premium evaporated, but the stock price has dropped to levels that fail to adequately reflect the company’s competitive advantages [..]. With our DCF-based target price suggesting some 40% upside potential, we think that our Buy call for Krka is fully justified,” it added. Erste's target price for the stock is 69.5 euro.

Krka was trading flat at 49.8 euro by 0935 GMT on the Ljubljana bourse on Monday.

($ = 0.7762 euro)