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 neutral 3-star rating.

• After our recent plant visit at Xepa-Soul Pattinson (Malaysia) (Xepa), we maintain our FY23F-25F earnings as Xepa’s guidance remains in line with our assumptions. Nevertheless, we have a better understanding of Xepa’s operations and insights on its long-term expansion plans.

• Xepa is involved in the development, manufacturing and marketing of off-patent/generic pharmaceutical products and medical devices. The Xepa campus is situated in Cheng Industrial Estate, Melaka, encompassing a 10-acre site with a built-up area of 38,249 sq metres.

• The campus consists of 7 facilities including laboratories, a liquids production plant (LPP), 3 solids production plants (SPP Novo, SPP 1 and SPP 2), a warehouse and offices. The campus is equipped with 550 employees and serve over 3,500 clinics, 2,000 pharmacies and 1,000 hospitals. Additionally, Xepa, which has a presence in over 22 countries, derives 25%–30% of 9MFY23 revenue from export markets.

• Xepa has an annual installed capacity of 200mil units and offers over 150 product types under its own brand, including tablets, capsules, powder for oral suspensions, liquids, creams/ointments and sterile eye drops. The majority of the products are prescription medications which focus on various therapeutic areas such as respiratory, alimentary, cardiovascular, dermatological and ophthalmology.

• The latest plant utilisation rates for SPP Novo, SPP 1 & 2, and LPP at the campus are 70%, which is the optimal rate. The reasons for not running at 100% are: (a) to reserve a buffer for spot orders, and (b) for maintenance purpose. Notably, SPP Novo still has space for 4 additional blistering lines for expansion until FY30F, which could double current capacity for tables and capsules, based on our estimate.

• However, as LPP is being optimally utilised, Xepa intends to retrofit existing plants for expansion on a 20.7-acre land. The land was recently acquired in Dec 2023 and is situated 400 metres from the Xepa campus. For now, Xepa has not provided the exact timeline for the LPP expansion.

• Despite recent rise in Covid cases, Xepa anticipates that demand for flu-related medication in 4QCY23 will not increase materially, possibly due to milder symptoms. As a result, we adhere to our view that revenue and earnings could be lower QoQ given demand for pharmaceutical products (especially flu-related medications) could experience moderation, in tandem with declining Malaysian flu cases in 4QCY23 (Exhibit 1).

• Going into FY24F, we expect a flattish YoY net profit growth mainly due to lower earnings contribution from the group’s 16%-owned associate Straits Apex, an orthopaedic business, as a result of lower effective stake from 40% to 16% after a partial disposal back in May 2023.

• The stock currently trades at a fairly-valued FY24F PE of 19x, at a slight 5% discount to its 5-year average of 20x. Also, Apex offers a mild dividend yield of 2.2%.

Source: AmInvest Research - 10 Jan 2024