We upgrade Apex Healthcare (Apex) to BUY from HOLD with a higher fair value (FV) ofRM3.12/share (from an earlier RM2.95/share), based on FY25F target PE of 22x, at 1 standard deviation above to its 5-year average of 18x. No ESG-related adjustments based on our neutral 3-star rating.
We raise FY24F-26F earnings by 5%-7% due to a 2%-point increase in manufacturing margin assumptions as 1HFY24 core net profit of RM44mil came in above expectations, accounting for 53% of our earlier full-year forecast and 59% of street’s.
Apex declared a higher 2QFY24 dividend of 3 sen (+0.5 sen YoY), which translates to a payout ratio of 49% vs. our current assumption of 42%.
On a YoY basis, Apex’s 1HFY24 core earnings decreased by 13% despite a 6% revenue increase mainly due to the negligible contribution by associate Straits Apex Group as its effective stake fell to 16% from 40% in 1H2023, further exacerbated by financing costs and amortisation of identified intangible assets for Next Ortho Investment Holdings amounting to RM2mil.
The manufacturing division accounted for 70% of 1HFY24 pretax profit, distribution 27% and corporate 3%.
Sequentially, Apex’s 2QFY24 core earnings rose by 19% notwithstanding a mild revenue decline of 3.8% due to a 1%- point improvement in gross margin to 23.5%, largely driven by a resilient manufacturing segment, coupled with a 7% reduction in selling & administration expenses.
We expect 2HFY24 revenue trajectory to remain steady as the group has introduced 9 new products in branded probiotics, gastrointestinal medications, topical preparations for skin, nose and throat. Over the longer term, management expects improving economies of scale from the RM67mil acquisition of Cheng 2 industrial office and warehouse last month that could reduce rental charges while expanding capacity for the group’s existing product lines.
Hence, pending further clarity from an analyst briefing later today, we maintain Apex’s FY24F-FY26F revenue growth of 7.0%-7.3%.
The stock currently trades at a decent FY25F PE of 19x, below its 5-year peak of over 25x. Also, Apex offers a fair dividend yield of 2%.
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