• We reiterate BUY on Duopharma Biotech (Duopharma) with an unchanged fair value (FV) of RM1.69/share, based on a target PE of 17x, at parity to its 5-year average. There is no ESG-related adjustment based on our 3-star rating.

• Yesterday, Duopharma received a letter of notification from Pharmaniaga Logistics on the extension of supply agreements or approved products purchase list (APPL) contracts to 31 Dec 2023 from previous 30 Jun 2023. This is for the supply of pharmaceutical and/or non-pharmaceutical products to hospitals, clinics and others under the government of Malaysia.

• To recap, Duopharma was awarded APPL contracts in 2017 for a 3-year period from 2017 to 2019. Before expiry in Jun 2023, the contracts were extended 3 times, as follows: (a) first 25 months to 31 Dec 2021, (b) additional 12 months to 31 Dec 2022, and (c) additional 6 months to 30 Jun 2023. The expiry led to a temporary shift in procurement process by the government from a guaranteed level of orders to buying on a need basis.

• Overall, we have a neutral view of this APPL contract extension to 4QFY23, expiring in 2 months. Typically, the Ministry of Health (MoH) does not spend much on medication procurement during 4Q because it is the MoH's account closing period. This is evidenced by Duopharma's seasonally weakened fourth quarter in the past. Hence, we maintain FY23F-25F earnings with our assumption that the more meaningful new APPL contracts will be awarded by 1QFY24F.

• We believe that the primary objective of the extension is to secure supply for MoH's facilities prior to Duopharma entering into long-term contracts with private sectors or foreign customers.

• The stock currently trades at a compelling FY24F PE of 12x at an unjustified 29% discount to its 5-year mean of 17x.

Source: AmInvest Research - 25 Oct 2023