Investment Highlights

• We maintain BUY on Apex Healthcare (Apex) with an unchanged fair value (FV) of RM3.45, based on a rolled-forward FY23F PE of 22x. This is at 0.5 standard deviation above its 4-year average of 20x, with a neutral 3-star rating.

• Our forecasts are maintained as 1QFY22 net profit of RM16mil was largely in line with expectations, accounting for 22% of our FY22F earnings and 24% of consensus. No interim dividend was declared as expected.

• YoY, 1QFY22 net profit rose 33%, largely driven by a 20% increase in revenue to RM216mil as Covid-19 movement restrictions were lifted amid mild Omicron symptoms, underpinned by stronger market demand for pharmaceuticals, consumer healthcare products and medical devices.

• However, on a QoQ comparison, 1QFY22 net profit decreased 24% despite a 9% revenue increase, driven partly by a single-digit product price hikes early this year. The sequential earnings contraction stemmed from:
  i) 85% associate pretax plunge to RM1mil from 40%-owned Straits Apex Straits, which benefited from an usually high recognition of backlogged orders in 4QFY21. This was also caused by dampened production output as its workforce was impacted by Covid-19 infections and delays in component deliveries amid ongoing supply chain disruptions.
  ii) 36% surge in selling and marketing expenses to RM16mil, partly driven by higher commission on increased sales and normalising travel expenditures.
  iii) 8%-point decline in manufacturing margin to 70% from a seasonally higher 78% in 4QFY21.

• Apex, which will not be impacted by the prosperity tax, is positioned to benefit from an ageing population, public health education advancement and steady healthcare expenditure increase.

• While the company does not have a dividend policy at this juncture, we highlight that its dividend payout ratio can be easily higher than our FY22F–FY24F assumption of 38% given the group’s substantive net cash of RM170mil (12% of market cap). Assuming a special dividend of 6 sen as in FY21, we estimate that FY22F yield that can be raised from 2% to a more attractive 5%.

• Against the backdrop of a stable and more visible FY23F– 24F earnings growth of 5%–6%, the stock currently trades at a decent FY23F PE of 19x, below its 4-year average of 20x (Exhibit 3).

Source: AmInvest Research - 19 May 2022