PublicInvest Research

Author: PublicInvest   |   Latest post: Tue, 25 Jun 2019, 11:52 AM


Apex Healthcare Berhad - Hit By Higher Cost

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Apex Healthcare (ApexH) reported a 13.5% drop in 1QFY19 net profit, its first YoY decline since 4QFY16. The Group’s net profit for the quarter stood at RM11.4m, missing ours but was in line with consensus’ estimates, at 19% and 21% respectively. The discrepancy was mainly due to lower operating cost assumptions. Following the commencement of operations in SPP Novo, we expect FY19-20F to remain challenging for the Group, as it will take c.2 years for SPP Novo to reach optimal operating capacity while the increase in depreciation cost would also result in margin compression. As such, we cut our FY19F and FY20F earnings forecasts by 10% and 15% respectively and downgrade our call from Neutral to Underperform with a lower TP of RM7.00, based on 15x FY20F EPS.

  • Missing estimates. ApexH’s 1QFY19 revenue increased to RM178.2m (+6% YoY), on the back of higher contribution from the sale of own-brand products to the private sector, contract manufacturing for external parties and distribution of pharmaceutical products. In spite of the stronger revenue, net profit for the quarter fell 14% YoY, due to higher start-up cost on its new manufacturing facility, SPP Novo. Lower contribution from its associate company, Straits Apex, also contributed to the weaker earnings. Share of earnings from the associate company fell by 50% YoY, to RM0.8m, due to weaker sales. The decline in 1QFY19 marks the first YoY decline in net profit since 4QFY16.
  • Rocky times ahead. One of the main contributors for ApexH’s lacklustre 1QFY19 results was due to the higher start-up cost in SPP Novo. To recap, the manufacturing facility commenced its operations in late December 2019 and targets to breakeven by the end of FY20F. Upon commencement of operations, the Group was negatively impacted by the higher depreciation and operating cost, resulting in margin compression. PBT margin for 1QFY19 declined to 8%, as compared to 10% in 1QFY18. On top of that, reinvestment allowance that ApexH benefitted from in 2017 and 2018 has been fully used up. Therefore, we expect the effective tax rate to return to its pre-reinvestment allowance level of c.25% going forward.
  • Silver lining. We note that the Group has obtained regulatory approval for its SPP Novo plant on 16th May. This signifies that the Group would possibly be able to start selling and distributing the products produced by the SPP Novo plant in near future. We expect to see stronger revenue in 2HFY19. Additionally, the Group also remain committed to develop a larger range of own-brand products as it fetches higher margins. However, ApexH’s unwavering effort to develop more products would only benefit the Group in longer term as there would normally be a gestation period in developing and launching a new product.

Source: PublicInvest Research - 24 May 2019

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