Investment Highlights

• We reiterate BUY on Duopharma Biotech (Duopharma) with a lower fair value (FV) of RM1.49/share (from RM1.69/share previously) to account for lower earnings estimates. Our FV is still based on an unchanged FY24F 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 9MFY23 core net profit of RM52mil generally came below expectations, accounting for 66% of our earlier FY23F earnings and 69% of street’s. As a comparison, 9M accounted for 70%-80% of FY18-22 core net profit. The deviation was mainly attributed to higher-than-expected operating costs and finance charges.

• Hence, we cut FY23F-25F earnings by 9%/12%/6% to factor in higher operating costs and finance charges. Our FY23F net profit incorporates potential tax savings of RM10mil in 4QFY23F upon the commissioning of plant K3 in 2QFY23.

• 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 3QFY23 revenue decreased slightly by 4% to RM169mil, primarily due to lower sales of discretionary consumer healthcare (CHC) products – Flavettes, Champs and Proviton.

• We believe this was due to continued destocking activities by consumers after robust purchases in FY20-21, as well as decline in consumer sentiments amid declining economic growth and higher living costs. Recall that CHC contributed 20% of Duopharma's revenue in FY22.

• Notably, 3QFY23 core earnings declined materially by 59% YoY to RM11mil. This was mainly attributed to lower core GPM (-8ppt YoY) as a result of higher electricity tariffs, labour costs, finance costs and incremental costs (RM5mil in FY23F) from the commencement of the new K3 facility.

• QoQ, Duopharma’s 3QFY23 revenue was comparable to 2QFY23 as the recovery in the private prescription pharmaceutical market was offset by weaker CHC products. However, the group’s 3QFY23 core earnings decreased by 18% QoQ, mainly impacted by higher operating costs and finance costs.

• Going into 4QFY24F, we believe there may not be much upside surprise for revenue and profit trajectory as the Ministry of Health (MoH) does not spend much on medication procurement given MoH’s account closing period falls in 4Q.

Source: AmInvest Research - 9 Nov 2023