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 adjustment based on our neutral 3-star rating.

• Duopharma’s 1QFY23 core net profit of RM26mil generally  came in within expectations, accounting for 23% of our FY23F  forecast and 27% of the street’s. As a comparison, 1Q  accounted for 22%-26% of FY18-22 core net profit.

• In addition, there may be potential tax savings of RM10mil upon the commissioning of plant K3 in FY23F. Hence, we  maintain FY23F-25F earnings.

• No interim dividend has been declared in this quarter as  Duopharma historically declares dividend in 2Q and 4Q over the past 3 financial years. 

• On a YoY basis, Duopharma’s 1QFY23 revenue increased by  8% to RM200mil, primarily due to continued robust 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 check-ups (Exhibit 2). 

• However, 1QFY23 core earnings declined by 10% to RM26mil mainly attributable to lower core gross profit margin (GMP) (- 2.7ppt) resulting from higher electricity tariffs and labour  costs. Nonetheless, we believe Duopharma’s core GPM could  normalise by raising product selling prices to pass on higher  operating costs, as guided by management.

• On a QoQ basis, Duopharma’s 1QFY23 revenue jumped 32%, mainly driven by an increase in demand from the Ministry of  Health (MoH) following lower year-end orders in 4QFY22,  given that 4Q is typically MoH’s account closing period.

• Nevertheless, the group’s 1QFY23 core earnings remained  flattish QoQ, partly mitigated by core GPM sliding by 4.4ppt  due to increased electricity tariffs and labour costs.  Furthermore, Duopharma experienced a positive effective tax  rate of 20% in the current quarter as compared to a negative effective tax rate of 12% in 4QFY22 due to tax incentives.

• In FY23F, we believe Duopharma could benefit from the  continued return of patients to hospitals, higher government  allocation to MoH in 2023F amounting to RM36.3bil (+12% YoY  vs 10-year CAGR of 7%) and moderating active  pharmaceutical ingredient prices.

• 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; (c) ever-growing Vitamin C market with its  popular brands, Champs and Flavettes; and (d) addition of 5 public and 19 private hospitals scheduled to be  operational in Malaysia over the next 3 years.

• The stock currently trades at a compelling FY23F PE of 12x – 29% discount to its 5-year average of 17x while offering  a decent dividend yield of 2.5%.

Source: AmInvest Research - 23 May 2023