Investment Highlights

• We initiate coverage on Apex Healthcare (Apex) with a BUY recommendation and fair value of RM3.82/share. Our fair value for Apex is based on a PE of 26x on FY22F EPS. The PE of 26x is slightly higher than the regional pharmaceutical industry’s average PE of 24.4x for FY22F.

• A pharmaceutical company with strong growth prospects in the orthopaedics segment. Apex is involved in the development, manufacturing, marketing and distribution of pharmaceutical products. It is one of Malaysia’s largest pharmaceutical wholesalers. However, what sets Apex apart from the other pharmaceutical outfits is its expansion in the orthopaedics segment. Although earnings contribution from this segment is still small at less than 10%, we believe that there is potential for growth. Apex’s orthopaedic device contractmanufacturing arm, STRAITS, is well positioned to benefit from emerging markets’ customer base. Rising price pressure in developed markets is also expected to benefit STRAITS, which specialises in cost-effective manufacturing solutions.

• Strong focus on R&D and new product launches. Apex plans to continue widening its range of high margin-yielding inhouse brands. Apex’s product range is expected to be bolstered by the completion of the acquisition of SPP NOVO. Through SPP NOVO, Apex is venturing into the manufacturing of oral solid dosage products. Apex’s current portfolio of products includes tablets, capsules, liquid medicine.

• Beneficiary of Covid-19 vaccine as it has cold chain facilities. Apex recently expanded its cold chain facility in both Malaysia and Singapore, capable of storing vaccines. Coupled with a robust warehousing system, we predict that Apex will be a prominent player in the Covid-19 vaccine distribution.

• Solid track record. Apex has been enjoying strong growth in the past three years, with revenue and core net profit rising at CAGRs of 5.8% and 12.0% respectively from FY16 to FY19. We attribute Apex’s success to the continual expansion of its high margin-yielding manufacturing segment, which has a three-year sales CAGR of 31%. Apex’s manufacturing division has a proven track record, boosted by quality manufacturing and distribution methods.

• Stable earnings growth. We forecast a core net profit growth of 10.1% for Apex in FY21F on the back of recovery in healthcare provider demand and strong growth in its manufacturing segment.

• Positive long-term industry outlook. This is expected to be underpinned by an ageing population, public health education advancement and steady healthcare expenditure increase.

Source: AmInvest Research - 4 Feb 2021