Investment Highlights

• We initiate coverage on Duopharma Biotech (Duopharma) with a BUY recommendation at a fair value of RM1.89/share, based on an FY23F target PE of 17.0x, at parity to its 5-year mean. There is no ESG-related adjustment based on our neutral 3-star rating.

• Incorporated in 1978 as a drug trading company, Duopharma slowly evolved into one of the leading manufacturers of generic drugs and branded consumer healthcare products in Malaysia.

• Currently, the group has 1 research & development (R&D) and 2 manufacturing facilities across the Klang Valley in Malaysia namely, Klang, Bangi and Glenmarie. All 3 facilities have received the Good Manufacturing Practises approval.

• With >40 years in the industry, Duopharma established several popular brands, including Omesec, Prelica, Champs, Flavettes, Proviton and Uphamol, which are well-recognised and accepted by consumers locally and globally.
• As the largest local pharmaceutical manufacturer, Duopharma stands ahead of peers by leveraging on: (a) the rising take-up of generic drugs in Malaysia, (b) upcoming industry’s patent cliff in 2022-2026 and booming biosimilars with the company’s strength in R&D and state-of-art manufacturing facilities; and (c) ever-growing Vitamin C market with its popular brands, Champs and Flavettes.
• We believe Duopharma is also a proxy to several positive long-term structural trends in Malaysia: (a) steady population growth and ageing population; (b) increasing prevalence and awareness of non-communicable diseases; (c) escalating healthcare expenditures.

• However, we expect some near-term revenue and profit normalisation in 4QFY22F due to weaker demand from the government and vitamin C sales are softening with Covid-19 transitioning into endemic status. Additionally, margin will ease slightly once insulin distribution activities pick up in 4QFY22F together with higher cost inputs from the stronger US$.

• Nevertheless, we project the group’s earnings to improve with a substantive CAGR of 14.5% in FY21-24F, which is premised on a revenue CAGR of 11.2%, driven by (a) management’s proven leadership and execution capability; (b) continuous roll-out of various products to meet the latest market demand, (c) leading advantage in pharmaceutical industry and (d) long-term positive structural trends in Malaysia.

• The stock currently trades at a compelling FY23F PE of 12.6x at an unjustified 25.8% discount to its 5-year average of 17x while offering a fair dividend yield of 2.4%.

Source: AmInvest Research - 16 Nov 2022