Investment Highlights

• We maintain our BUY call on Apex Healthcare (Apex) with an unchanged fair value of RM3.77/share. This is based on a PE of 26x on FY22F EPS. The PE of 26x is slightly higher than the regional pharmaceutical industry’s 24.4x.

• We believe that Apex is set to benefit post-Covid, as its manufacturing arm is poised to recover with returning hospital and clinic pharmaceutical demand, both in local and foreign markets. STRAITS is similarly set to benefit from rising surgical and inpatient volumes.

• We are also optimistic on the growth prospects of Apex’s manufacturing arm. It won contracts to export products to the Philippines and Australia, and a government tender worth RM13.1mil in FY20.

• Key highlights from last Friday’s briefing include:

1. Mass vaccinations will bring forth recovery:

a. Returning outpatient volumes at clinics and hospitals.

b. Respiratory illness cases are on the downtrend. Attention is shifted towards dermatological, cardiovascular and metabolic drugs. These drugs are already seeing higher sales than in previous years.

2. Manufacturing arm:

a. Apex won a three-year government tender worth RM13.1mil to manufacturer Vitraq, an antiplatelet drug, starting in August 2020. In total, It has six other active tenders worth more than RM1mil annually and 32 tenders of less than RM1mil in total.

b. Exports were deferred from 3QFY20 and 4QFY20 to FY21F due to lower demand. These will be shipped this year to distributors. The risk is Myanmar, which is currently experiencing a coup. Myanmar is Apex’s second largest export market.

c. Apex has started exporting to the Philippines. Its first product was an eye drop product called EyeMo. The large population in the Philippines provides significant growth potential for sales.

d. Apex will be exporting for the first time (a cardiovascular product) to Australia in FY21F. The UK producer in Australia has confirmed that it will receive two additional products from Apex in the coming years.

e. The utilization rate for SPP Novo fell to 62% in FY20 from 74% in FY19. This is due to lower clinical demand and instances of respiratory illness. Cough and cold drugs are among the group’s best-selling products.

f. Looking forward, a second packaging line was scheduled to operate in FY20 but was deferred due to lower utilization rates. The outlook is better in FY21F, hence SPP Novo is expecting to see an increase in capacity and utilization rates.

g. Eight products launched in FY20 have helped manufacturing segment grow. In FY21F, these products are expected to have a market size of over 20mil.

h. RM10.7mil is expected to be allocated for maintenance capex and software for system integrity. An additional RM6.3mil for the 2nd packaging line in SPP Novo.

3. STRAITS:

a. 3 MNCs make up 91% of STRAITS’ customer base – Smith & Nephew, Wright Medical and DJO. It is now looking to further diversify its customer base.

b. Apex is planning to build an integrated facility to house all of STRAITS’ operations in a single site in the long term. Currently, the group is operating in three leased factories, which are located on both Penang Island and mainland.

Source: AmInvest Research - 1 Mar 2021