Investment Highlights

• We maintain BUY on Duopharma Biotech (Duopharma) with a higher fair value (FV) of RM2.06/share (from RM1.89/share previously), based on higher earnings expectations and an unchanged FY23F target PE of 17x, at parity to its 5-year average. There is no ESG-related adjustment based on our neutral 3-star rating.

• Duopharma’s FY22 core net profit of RM111mil beat expectations, coming in 9% above our forecast and 23% above street’s. The variance from our estimation was primarily attributable to lower effective tax rates.

• Hence, we increase net profit forecasts by 9% for FY23F and 12% for FY24F with higher gross margin assumptions. In addition, we introduce FY25F earnings with a 7% YoY growth, underpinned by the rising take-up of generic drugs in Malaysia, upcoming industry’s patent cliff in 2022-2026 and booming biosimilars, as well as ever-growing Vitamin C market with its brands, Champs and Flavettes.

• The group declared an interim dividend of 1.8 sen/share in 4QFY22, bringing FY22 total dividend to 2.3 sen/share (implying a payout of 31%), which was largely within our forecast of 2.2 sen/share.

• On a YoY basis, Duopharma’s 4QFY22 core earnings rose 41% to RM26.4mil, spurred by a:
  (i) 4.5% revenue growth supported by continued higher demand for ethical classic products as both public and private sectors restocked inventories in response to the return of Malaysians to hospitals for elective treatments and an increase in the private sector’s customer base; and
  (ii) better core gross profit margin (+5ppt) thanks to higher economies of scale and better product-mix , contributed by higher sales of manufactured products (higher GPM) to the private sector together with reduced insulin distribution (thinner GPM) to the government; and
  (iii) negative effective tax rate at -12% (vs a positive rate of 8% in 4QFY21) due to tax incentives in 4QFY22 and overprovisioning of tax expenses in 4QFY21.

• On a QoQ basis, Duopharma’s 4QFY22 core earnings declined by 5% in tandem with a revenue decrease of 14%. Notably, the group’s sales seasonally peak in the first 3 quarters of the calendar year and will gradually taper off in the final quarter mainly due to lower year-end orders from Ministry of Health (MoH).

• Going forward, we believe demand from MoH could pick up again in 1QFY23F and beyond, together with continued strong demand from the private sector, underpinned by the return of patients to hospitals, prevalence of Covid-19 and rising flu cases in Malaysia (Exhibit 2) amid ongoing drug shortages (Exhibit 3).

• We continue to like Duopharma as the largest local pharmaceutical manufacturer which can leverage 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.

• The stock currently trades at a compelling FY23F PE of 13.6x – 20% discount to its 5-year average of 17x while offering a decent dividend yield of 2.2%.

Source: AmInvest Research - 24 Feb 2023