Investment Highlights

• We reiterate HOLD on Apex Healthcare (Apex) with a slightly higher fair value (FV) of RM3.93/share (from RM3.90/share previously) to account for a mild forecast adjustment, albeit  based on an unchanged FY23F target PE of 20x, at parity to its  5-year average. No ESG-related adjustments based on our 3- star rating.

• We tweaked FY23F-25F earnings by 1%/2%/2% to account for  Apex’s share of RM1mil-RM3mil lease income from a new Batu  Kawan facility. Nevertheless, Apex did not reveal any novel alternative investments with the US$215mil divestment proceeds of 100% effective stake in Straits Apex (SA) to 40% by  Apex’s 40%-owned Straits Apex Group (SAG) in a briefing yesterday. These are the salient highlights: 
   
  • Apex indicated that the divestment proceeds received by SAG  will be first used to pay transaction costs and bonuses to  SAG’s management team. Both totaled <US$10mil, which will have more clarity in the coming 2Q result. The proceeds will also be used to finance the construction of SAG’s RM70mil  facility in Batu Kawan. 
     
  • The balance will be partially or fully distributed as dividends to SAG shareholders by end-Jul 2023. Apex will evaluate the received dividend from SAG for future capex or special dividends to its own shareholders.
     
  • We believe that the one-off disposal gain in 2QFY23 could be less than RM300mil that was estimated in our report yesterday after learning that there will be transaction costs and bonuses  to be paid. Notably, there is no tax on the one-off and noncash gain.
     
  • SAG’s wholly owned Batu Kawan facility will have a total built-up area of 237K sq ft on a 7.2-acre site, comparable to its existing leased facilities in Prai, Penang and Penang Science  Park, which have a combined built-up area of 238K sq ft.
     
  • The purpose of the Batu Kawan facility is to enable SAG to relocate all orders from existing facilities to the new facility to increase operational efficiencies. This excludes the recent  30% expansion in Penang Science Park. The relocation will occupy 75% of the new facility, leaving 25% for future expansion.
     
  • SAG will lease the Batu Kawan facility to SA at RM2.80/sq ft per month from 4Q2023F onwards. This translates to rental income of RM8mil per annum (implying an 11% rental yield) to  SAG and RM3.2mil per annum to Apex (based on its 40%  equity stake in SAG). 
     
  • Separately, the Singapore-based joint venture, Zynexis  Healthcare, commenced submitting an initial batch of pharmaceutical products to regulatory authorities in selected  ASEAN markets for approval. The products are mainly injectables for the treatment of cancers.
     
  • The group anticipates that revenue and profit contribution from Zynexis will not begin until 2025 and is likely to  be insignificant. Hence, we do not include Zynexis’ contribution in our FY25F revenue.
     
  • Apex adhered to the guidance presented in Feb 2023 result briefing that robust demand for flu-related medications resulting from restocking activities could persist until 1H2023F, before normalising in 2H2023F due to declining flu cases (Exhibit 1) and softening demand for Covid-related products in Malaysia. Therefore, we made no adjustments to our FY23F-25F revenue.
     
  • The increase in electricity surcharge from 3.7 sen/kwh to 20 sen/kwh for the period of Jan-Jun 2023 could increase Apex’s manufacturing cost structure by RM2.1-2.7mil (or 2%-3% of FY23F net profit). However, Apex reaffirms that the group will pass on the higher costs by increasing overall product prices to protect margin. This response is consistent with Duopharma Biotech.
     
  • On a positive note, Apex guided that the prices of active pharmaceutical ingredients (API) are stabilising, which  is consistent with Indian-based IIFL Securities’ (IIFL) API/KSM pricing index revealing that API import costs  (mostly from China) have declined 2%-8% QoQ since 3Q2022. Typically, API accounts for 40% of medicinal cost.  We believe that this development could bring some margin expansion to Apex’s manufacturing segment. As for now, we do not factor this in our forecasts pending improved clarity on price trends.
     
• The stock currently trades at a fairly valued FY23F PE of 20x, near its 5-year average of 20x. Also, Apex offers a slight  dividend yield of 2%. 
   
• On a positive note, Apex’s 1-for-2 bonus issue proposal was approved on 17 May 2023, with the ex-date on 8 Jun  2023. We continue to view this exercise positively which could increase trading liquidity and improve the affordability of the stock, hence potentially broadening its shareholder base. Our ex-date FV translates to RM2.62/share.  

Source: AmInvest Research - 26 May 2023