Investment Highlights

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

• We maintained FY23F-25F earnings after a result briefing yesterday. These are the salient highlights:

• Apex indicated that the RM217mil (or 30.2sen/share) dividend proceeds received from 40%-owned Straits Apex Group will be utilised on potential new business venture that could generate greater shareholders’ values, rather than special dividends to shareholders. Hence, we maintain FY23F-25F DPS.

• For now, the group is evaluating several projects in a number of countries primarily involved in pharmaceuticals, medical devices or consumer healthcare. The shortlisted project will be disclosed in 3Q/4QFY23.

• Apex indicated that the weaker QoQ revenue performance was mainly attributed to lower sales of discretionary consumer healthcare products ie. Nestle Health Science under the wholesale & distribution segment, due to weaker consumer sentiment as a result of slowing economic activities and higher living costs, coupled with destocking activities by consumers after robust purchases in F20-21.

• Going into 2H, Apex adhered to the guidance presented in Feb and May 2023 results briefings that demand for pharmaceutical products will be weaker than 1H given delayed spending on discretionary consumer healthcare products and normalising flu cases. This is underscored by Malaysian flu cases being relatively lower in Jul and Aug 2023 compared to 1HFY23 (Exhibit 1).

• For 16%-owned Straits Apex involved in orthopedics business, the FY23F target revenue will be in the higher ranges of +US$60mil compared to US$60mil in FY22, which is our assumption this year.

• Separately, the Singapore-based joint venture, Zynexis Healthcare, is working on the procurement system and registration of pharmaceutical products to regulatory authorities in selected ASEAN markets. Notably, the products are mainly injectables for the treatment of cancer.

• The group anticipates that revenue and profit contribution from Zynexis will not begin until late 2025 or early 2026, which is later than Apex’s earlier guidance on early 2025 in May briefing. Nevertheless, the maiden contribution is likely to be insignificant. Hence, we have not included Zynexis’ contribution in FY23F-25F revenue.

• Lastly, 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 1.2%-13% QoQ since 3Q2022. Typically, API accounts for 40% of medicinal cost.

• We have not factored this in FY23F earnings as there may not be any margin tailwind given that declining API costs could be partially negated by higher electricity tariff. Moreover, Apex might not be able to increase product prices in 2HFY23F to fully offset the higher electricity tariff amid weakening demand.

• The stock currently trades at a fairly valued FY23F PE of 20x, near its 5-year average. Also, Apex offers a slight dividend yield of 2%.

Source: AmInvest Research - 25 Aug 2023