Investment Highlights

• We reiterate BUY on Apex Healthcare (Apex) with a higher fair value (FV) of RM4.21/share (from RM3.73/share previously) based on higher earnings expectations and FY23F target PE of 20x, at parity to its 5-year average. There is no ESG-related adjustments based on our 3-star rating.

• Apex’s FY22 core net profit of RM96.7mil beat expectations, coming in 12% above our forecast and 18% above street’s. The deviation from our estimation was primarily attributable to continued strong demand for influenza (flu)-related medication and outstanding performance from 40%-owned Straits Apex.

• Hence, we increased net profit forecasts by 24% for FY23F and 25% for FY24F. In addition, we introduce FY25F earnings with a 7% YoY growth, underpinned by an ageing population, public health education advancement and continuous healthcare expenditure increase.

• The group declared a final dividend of 3.5 sen/share and special dividend of 2 sen/share in 4QFY22, bringing total dividend payout in FY22 to 8.5 sen/share (implying a payout of 42%), which beat our forecast of 6.1 sen/share.

• On a YoY basis, Apex’s 4QFY22 core earnings soared 52% to an all-time quarterly record of RM31.5mil, spurred by a:
  (i) 12% revenue growth from strong demand for flu-related medication especially in Malaysia and Singapore due to the prevalence of Covid-19 and elevated flu cases in the 2 countries;
  (ii) better gross profit margin (+2.2ppt) thanks to increased share of higher margin manufacturing division from 19% in 4QFY21 to 23% in 4QFY22; and
  (iii) surge in associate contribution to RM14.5mil (+2.6x) from the group’s 40%-owned Straits Apex due to clearance of order backlogs and new sales.

• On a QoQ basis, Apex’s 4QFY22 core earnings rose by 18%, despite a 5% decrease in revenue. The stronger earnings was mostly related to an exceptional surge (+2.1x QoQ) from Straits Apex.

• To recap, Apex guided in Nov 2022 result briefing that sales could normalise from Dec 2022 onwards given declining flu cases in Malaysia and Singapore.

• However, the number of flu cases in Malaysia has been increasing steadily since mid-Oct 2022, while in Singapore, the trend began in late-Jan 2023 (Exhibit 2 & 3). We believe this development reignited demand for flu-related medications amid ongoing drug shortages, especially in Malaysia (Exhibit 4).

• Apex has been enjoying strong CAGR earnings growth of 12% over the past 20 years (Exhibit 5), anchored by an ageing population, public health education advancement and steady healthcare expenditure increase. In the near term, Apex is poised to ride on the prevalence of Covid-19 and elevated flu cases in Malaysia and Singapore amid ongoing drug shortages, especially in Malaysia.

• 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 RM158mil represents a significant 10% of its market cap.

• The stock currently trades at a compelling FY23F PE of 16x – 20% discount to its 5-year average of 20x while offering a decent dividend yield of 2.4%.

• On a positive note, Apex proposed a 1-for-2 bonus issue, which could increase trading liquidity and improve the affordability of the stock, hence potentially broadening its shareholder base and mitigate the valuation discount.

Source: AmInvest Research - 23 Feb 2023