Investment Highlights

• We reiterate BUY on Duopharma Biotech (Duopharma) with an unchanged fair value (FV) of RM2.06/share. This is based on a FY23F target PE of 17x, at parity to its 5-year average. There is no ESG-related adjustments based on our 3-star rating.

• We maintain our earnings forecast for Duopharma after an analyst briefing recently. These are the salient highlights of the briefing:-
  • Duopharma has been enjoying robust growth in sales since the beginning of the year. Even though the demand for consumer healthcare products softened, sales in the ethical classic products segment has been robust.
  • Going into FY23F, we believe that Duopharma’s revenue growth trajectory will continue especially from the ethical classic products segment, driven by:-
    1. The return of patients to hospitals for elective surgeries (Exhibit 1),
    2. Rising influenza (flu) cases in Malaysia (Exhibit 2) amid ongoing drug shortages (Exhibit 3),
    3. Recovery in the export market due to easing logistics constraints. To recap, FY22 export sales was 9% lower than FY19 (Exhibit 4).
  • Based on the India-based IIFL Securities’ (IIFL) API/KSM pricing Index, costs of active pharmaceutical ingredients (APIs) have declined in the past 2 quarters ie. -4.5% QoQ in 3Q2022 and -12% QoQ in 4Q2022. We view this development positively as APIs account for 40% of medicine costs. Thus, this might provide margin tailwinds to Duopharma in FY23F.
  • Duopharma will also enjoy a RM10mil reinvestment tax allowance in FY23F as plant K3 is expected to receive the certificate of completion and compliance (CCC) by 1HFY23.
  • On a negative note, we foresee the following challenges for Duopharma in FY23F:
    1. A volatile US$ against MYR could affect profit margins as almost all of the APIs are imported in US$ while the majority (>90%) of the sales are in MYR.
    2. Recent rise in electricity surcharge from 3.7 sen/kwh to 20 sen/kwh in 1H2023 and the increase of entitlement threshold for overtime work from ≤RM2K/month to ≤RM4K/month effective Jan 2023 could raise Duopharma’s operating costs by RM12-14mil (or 10%- 12% of FY23F profit). 
    3. Existing approved products purchase list (APPL) could be extended from Jun 2023F to Dec 2023F based on 2017’s US$/MYR exchange rates of RM4.20-RM4.30 (vs RM4.50 currently). This is expected to increase the cost of procuring the APIs.
  • Nevertheless, Duopharma guided that the operational risks could be mitigated by hiking the product selling price in the private sector. This is consistent with the guidance by another listed pharmaceutical company.
  • We view the growth in the private sector segment positively as Duopharma has the flexibility to increase prices. The private sector does not procure supplies in bulk. Hence, there is more room to negotiate prices. Duopharma’s revenue share of the private sector increased from 43% in FY19 to 51% in FY22.
  • As for Pharmaniaga, we understand that Duopharma has not faced payment issues so far. Pharmaniaga accounted for 23%-27% of Duopharma’s sales in FY22.
• We continue to like Duopharma as it is the largest local pharmaceutical manufacturer in Malaysia. Prospects are positive underpinned by (a) the rising take-up of generic drugs in Malaysia, (b) expiration of patents from 2023F to 2026F, (c) booming bio-similar market and (d) the growing Vitamin C market, which will benefit the Champs and Flavettes Brands.
• The stock currently trades at a compelling FY23F PE of 12.7x, which is 25% below the 5-year average of 17x. Dividend yield is also decent at 2.3%. We reckon that Duopharma is a good exposure for investors seeking to switch from Pharmaniaga.

Source: AmInvest Research - 13 Mar 2023