Investment Highlights

• We maintain our BUY call on Apex Healthcare (Apex) with an unchanged fair value (FV) of RM3.33/share, based on an unchanged PER of 23x FY22F EPS. We make no ESG related price adjustment for our rating of 3 stars.

• Here are the highlights from last Friday’s results briefing:

1. The drag from associated company Straits Apex Sdn Bhd (SA) is expected to ease in the coming quarters. Smith and Nephew, which contributes to ~62% of SA sales, performed the bulk of 1QFY21’s transactions in 4QFY20. Pandemic uncertainty has also led it to delay the bulk of their remaining orders to 2HFY21. Currently, orders stand at a level similar to last year’s.

2. Currently, poor utilisation rates at SPP NOVO are expected to keep manufacture segment margins depressed. The utilisation rate for 1QFY21 was 62%. FY20’s average utilisation rate was 67%, while FY19’s was 74%. The group has deferred the expansion until pharmaceutical demand returns.

3. Rising freight and raw material costs are likely to compress margins in the coming quarters. While average selling prices (ASP) for group brand products remain unchanged, they may rise in the coming quarters. External products have already seen an ASP increase of 6%.

4. With the Ministry of Health’s (MoH) expenses tied up by the pandemic resurgence, the group believes government tenders are hard to come by at the moment. We expect this normalise in FY22F, as the bulk of the MoH’s mass vaccinations will have already been completed by then.

• Going forward, we remain positive on Apex’s future prospects as a recovery play. Pent-up demand is likely to provide the group a lucrative FY22F. Also, Apex’s state of the art SPP NOVO facility is expected to give it an edge in winning lucrative government tenders when the pandemic situation improves.

• In the short term, however, we forecast subdued performances as result of rising raw material costs and poor pharmaceutical demand. We expect better quarterly results going forward as the group’s SA unit is expected to draw in stronger sales.

Source: AmInvest Research - 24 May 2021