Investment Highlights

• We reiterate HOLD on Apex Healthcare (Apex) with a higher fair value (FV) of RM2.64 (from RM2.62/share previously), based on a rolled-forward FY24F target PE of 20x, at parity to its 5-year average. No ESG-related adjustments based on our 3-star rating.

• Apex’s 1HFY23 core net profit of RM50mil was within our expectation, accounting for 53% of our full-year forecast, but beat street’s at 56%. Comparatively, 1H accounted for 40%- 50% of FY18-22 core net profit. We exclude a 2QFY23 one-off gain of RM304mil from a partial divestment of the group’s orthopaedics business, reducing its effective stake to 16% from 40% (Exhibit 2).

• Nevertheless, we believe the revenue and core earnings will be lower in 2HFY23F compared to 1HFY23, as guided by management in its May result briefing. Hence, we maintain FY23F-25F earnings.

• The group declared its first interim dividend of 2.5 sen/share in 2QFY23 (implying a payout of 35.6%), which is in line with our forecast of 5.5 sen/share given Apex historically paid higher DPS post-4Q result.

• Notably, the group received a dividend payout of RM217mil (or 30.2sen/share) from Straits Apex Group (SAG). This could mean upside possibilities of special dividend in 2HFY23F pending management guidance tomorrow.

• On a YoY basis, Apex’s 2QFY23 core earnings increased by 6% to RM25mil, in line with a 3% revenue growth.

• QoQ, Apex’s 2QFY23 core earnings was flattish despite a 13% decline in revenue as Apex historically exhibited a weaker seasonal revenue 2Q from 1Q. The stronger net margin was mainly spurred by a 41% growth in associate after-tax contribution to RM6.5mil from the group’s 16%-owned SAG. We believe this was driven by an order recovery in 2QFY23 after 1QFY23 moderation. To recap, the orthopaedics business experienced robust backlog orders in 4QFY22.

• Apex guided in May 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 in Malaysia. This is underscored by Malaysian flu cases being relatively lower in Jul and Aug 2023 compared to 1HFY23 (Exhibit 3).

• The stock currently trades at a fairly-valued FY24F PE of 19x, near its 5-year average of 20x. Also, Apex offers a slight dividend yield of 2%.

Source: AmInvest Research - 24 Aug 2023