KUALA LUMPUR (Feb 28): Massive unsold Covid-19 vaccine impairment sparked panic selling of Pharmaniaga Bhd shares on Tuesday (Feb 28).

The generic drug maker’s share price plunged 50% to a low of 22 sen in the morning session, before settling at 27 sen, still down 17 sen or 38.64%. Trading volume swelled to 124.08 million shares, making it the fifth most traded stock on Bursa Malaysia.

Some RM222 million of Pharmaniaga's market capitalisation evaporated on Tuesday, with the company last valued at RM353.76 million.

The heavy selling came after Pharmaniaga it slipped into Practice Note 17 (PN17) status following a whopping RM552.3 million impairment.

Besides steep losses, there are concerns that the main supplier of generic drugs to public hospitals will need a cash call to recapitalise itself.

Boustead Holdings Bhd controls a 51.84% stake in the group, while Lembaga Tabung Angkatan Tentera (LTAT) owns a 8.62% stake.

In view of the sharp fall, proprietary day trading (PDT) and intraday short-selling (IDSS) of Pharmaniaga's securities were suspended for the rest of the trading day, due to the last done price of the approved securities dropping more than 15% from the reference price.

Short-selling under PDT and IDSS will only be reactivated at 8.30am on Wednesday.

Both Hong Leong Investment Bank (HLIB) Research and CGS-CIMB Securities downgraded their calls on the pharmaceutical group, telling clients to offload its shares. Kenanga Research also downgraded the stock to "underperform", with a lower target price (TP) of 33 sen.

HLIB slashed its TP to 31 sen from 63 sen prior, while CGS-CIMB cut its TP to 25 sen from 58 sen.

“Given the downside and the uncertain outlook after slipping into PN17 status, we are downgrading our rating of Pharmaniaga to 'sell',” said HLIB analyst Sophie Chua Siu Li in a note on Tuesday, adding that the TP reflects an unchanged price-earnings (P/E) multiple of 11.6 times its earnings per share (EPS) estimate of 2.7 sen for the financial year ending Dec 31, 2023 (FY2023).

She also cut her earnings forecasts for FY2023 and FY2024 by 51% on higher operating expenditure (opex) and finance cost assumptions.

“We note that there could potentially be a reversal in the impairment provision, should Pharmaniaga be able to sell more of its existing Covid-19 stockpile. Currently, the group is engaging with various parties, including the Islamic Development Bank and the Ministry of Health, to sell its stockpile,” she said.

Meanwhile, CGS-CIMB analyst Sherman Lam Hsien Jin said the stock was downgraded as he believes the group's earnings will remain weak and highly uncertain in the near to medium term, amid its PN17 status and highly leveraged balance sheet.

“We slash our FY2023/24 core EPS [forecasts] by 50%/43% to bake in higher opex and interest cost,” he said.

Lam cut Pharmaniaga’s TP by 57% to 25 sen after the earnings cuts, and he is applying a 30% discount to its fair value (still based on 13 times calendar year 2024 P/E, which is the five-year mean). “The valuation discount is to account for the weak earnings outlook and balance sheet (ascribing an about 50% probability of the worst-case scenario, namely an enlarged share base post regularisation, and losing the government concession), as well as lower investability of its stock (due to the PN17 status),” he explained.

Lam believes that it will be challenging for Pharmaniaga to offload its vaccines at meaningful prices in the next few quarters, noting that its sales have been subdued since the end of 2021.

“We expect its vaccine sales to still be negligible going forward, as the seven-day trailing average of Covid-19 vaccinations administered has fallen to a meagre 1,000 to 1,500 doses per day since mid-February 2023 (versus the peak of over 500,000 doses per day in the third quarter of 2021), and Covid-19 cases, hospital/intensive care unit admissions and deaths have been on a decline since early 2022.”

The large impairment dragged the group into its deepest quarterly losses of RM664.39 million, or 49.19 sen per share, for the fourth quarter ended Dec 31, 2022.

The group’s balance sheet as at Dec 31, 2022 showed that its short-term borrowings, which would be due within six months, swelled to RM968.27 million from RM570.05 million a year ago. Its long-term borrowings amounted to RM190.6 million, versus RM285.17 million previously.

Notably, the pharmaceutical firm’s receivables increased to RM351.66 million as at end-2022, from RM297.75 million a year ago. Its cash balance was at RM52.84 million, while its inventory dropped to RM767.26 million, from RM1.26 billion a year ago, after the impairment.

CGS-CIMB: More fundraising likely to regularise company

Lam believes that Pharmaniaga will need to seek additional equity fundraising to bring its shareholders’ equity levels back to levels above the PN17 threshold.

“This could entail a rights issue, private placement, special issue, or privatisation by key shareholders LTAT and/or Boustead (which is also 59.4%-owned by LTAT).

“Pharmaniaga also announced in its results disclosure that it breached certain financial covenants for its term loan and revolving credit facilities, with a total carrying value of RM94 million, which were thus classified as current liabilities.

“While it is in negotiations with creditors on the matter, we believe there is risk of the company defaulting on these debt instruments (unless major shareholders Boustead and/or LTAT intervene), aside from potentially breaching covenants of other debt instruments in the coming months, especially after the release of its audited financial statements (likely in April 2023),” he said.

According to Lam, the fundraising exercise should be able to help Pharmaniaga continue to secure funding for its working capital and maintenance capital expenditure/opex without violating debt covenants.

“However, investors may not take well to these exercises, as they may be reluctant to increase their investments in the company, where recoverability or the returns on their investments are uncertain at this juncture, especially amid the ongoing weak economic environment. These exercises, which may require shareholders’ approval in an extraordinary general meeting, may also take some time to conclude. In the meantime, Pharmaniaga could struggle to meet its short-term payment obligations, in our view.”

He added an anecdotal assumption that the drugmaker will aim to raise RM390 million by issuing new shares at 40 sen per share to increase shareholders' equity to above 25% of its issued and paid-up share capital, while securing at least RM40 million.