Investment Highlights

• We maintain BUY on Apex Healthcare (Apex) with a higher fair value (FV) of RM3.73, 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.

• The higher fair value mainly stems from our FY22F-24F earnings increase of 7%/8%/9% as Apex’s 1HFY22 core net profit of RM38.6m came in above expectations, accounting for 54% of our earlier FY22F earnings and 56% of consensus. As a comparison, 1HFY21 accounted for 37% of FY21 core net profit.

• An interim 2QFY22 dividend of 3.0 sen/share has been declared (implying a 1HFY22 payout of 37%), which beats our earlier assumption of 5.7 sen/share in FY22F as Apex historically tends to declare a higher 2H dividend. Hence, we revised upwards our FY22F dividend by 7% to 6.1 sen/share.

• On a YoY basis, Apex’s 2QFY22 core earnings soared by 85% to an all-time record RM23.6mil, spurred by a (i) 15% revenue growth from strong demand for pharmaceuticals and consumer healthcare products; (ii) better gross profit margin (+2.2ppt) thanks to the increased share of higher margin manufacturing division; and iii) substantial associate contribution of RM7m (10.3x) from the group’s 40%-owned Straits Apex.

• Apex accelerated the launch of 2 paracetamol products in this quarter to address market shortages as well as the commissioning of another blister packing line in Melakabased SPP NOVO, which expanded its annual installed capacity for tablets and capsules by 36%.

• On a QoQ basis, Apex’s 2QFY22 core earnings improved by 58% despite revenue contracting by 3%. The stronger earnings is attributed to the strong associate contribution and higher gross profit margin (+1.3ppt) due to the share of revenue from higher margin manufacturing division increasing to 9.9% from 8.5% in 1QFY22.

• In previous analyst briefing, Apex expected that the stronger growth in flu-related medicine such as paracetamol, cough/flu medication and lozenges could partially offset the sales moderation for face masks, oximeters and test kits as the country transitions towards Covid-19 endemic status.

• We believe the demand for flu-related medicine is supported by rising flu cases in Malaysia that are higher than 2019 levels (Exhibit 2). This abnormal phenomenon could be attributed to (a) low population immunity due to lack of exposure to influenza over the last 2 years and (b) low flu vaccination uptake in Malaysia, according to The Malaysian Influenza Group. In addition, Omicron, a Covid 19 variant manifesting milder symptoms, is becoming a community respiratory illness.

• Apex plans to capitalise on improving prospects by commencing its new cough/cold syrups production line in 3QFY22, which could double current capacity.

• Furthermore, 40%-owned Straits Apex has secured export orders in 2HFY22 which are higher than the executed orders in 1HFY22. With strong demand ahead, the associate plans to expand production space by 30% in 4QFY22.

• Apex has been enjoying strong growth over the past 20 years with revenue rising at a decent CAGR of 9% and earnings 10% (Exhibit 3), anchored by an ageing population, public health education advancement and steady healthcare expenditure increase. Apex also exhibited resilience and flexibility during the Covid-era via rapid identification and supply of in-demand products. Additionally, Apex’s net cash position of RM130mil represents a significant 9% of its market cap.

• The stock currently trades at a compelling FY23F PE of 18x, below its 4-year average of 20x. We will be providing further updates following an analyst briefing later today.

Source: AmInvest Research - 17 Aug 2022