• Keep BUY and MYR1.41 TP (DCF), 17% upside. 2023 full-year results missed our and Street’s expectations as a result of weaker-than-expected sales from the consumer healthcare (CHC) division, higher interest costs, and a weakening MYR. Moving forward, we expect Duopharma Biotech’s growth to be underpinned by robust drug procurements from both the public (due to higher budget allocations for 2024) and private sectors, and renewal of the Approved Product Purchase List (APPL) by 1Q24.

• Results overview. 4Q23 core profit slipped 10% QoQ on seasonality (4Q being the Health Ministry’s (MOH) accounts closing period, which results in an absence of public sales contributions for the whole of December). Full- year core earnings fell 38% YoY to MYR61.5m, accounting for 86% and 92% of our and Street estimates. The weaker-than-expected results were due to sluggish performances from the CHC wing (-25% YoY), offset by robust performances from private (c.+10% YoY) and export sales (+54% YoY).

• Margins overview. 4Q23 GPM contracted 8ppts YoY – likely on the upwards revision in electricity tariffs. DBB was also impacted by the USD’s strengthening, which drove active pharmaceutical ingredient prices (APIs) up. Core profit margins were 12ppts YoY down on the incremental costs from the new production facility (K3) that DBB is no longer allowed to capitalise.

• Outlook. We expect sequential improvements in public sales in the coming quarters on: i) Higher budget allocations for drug procurements to MOH (2024: MYR5.5bn; 2023: MYR4.9bn) and ii) concluded price negotiations under the APPL mechanism (contracts are set to be finalised by 1Q24). The CHC demand decline has bottomed out and management is expecting this to grow and revert to a steady state in 2024 (12% based on our estimate, which is equivalent to the 10-year average growth of domestic medical products retail sales). Growth momentum from the private sector should continue to be anchored by the pick-up in international patients, as well as the ageing society and rising non-communicable disease or NCD trends.

• We make no changes to our earnings estimates. Maintain BUY and DCF- derived MYR1.41 TP. Valuation is appealing, with DBB trading at 12x 2024 forward P/E, 1SD below its 5-year historical mean of 17x. We deem this as unjustified, given: i) Its better-than-peers margins profile, ii) long-term growth potential from investments in higher-value products such as oncology and biosimilar products (eg ERYSAA, a halal-certified erythropoietin or EPO that treats anaemia in patients with chronic kidney diseases ,and iii) the renewal of APPL contracts that entails better FX terms.

• Key risks: Lower than expected volumes sold and depreciation of the MYR against USD.

Source: RHB Research - 23 Feb 2024