• We came away neutral from DBB’s 2Q22 briefing. Consumer healthcare sales held up nicely in 1H22 and into Jul-Aug, in line with our expectations.
• Ethical sales may taper hoh in 2H22F, buffered by some export recovery. Cost increases will be partly passed on to both the private and public sectors.
• Reiterate Add with an unchanged TP of RM1.70.

Reiterate Add and TP of RM1.70

● We came away neutral from Duopharma’s (DBB) 2Q22 results briefing today. Thus, we retain our Add rating and TP of RM1.70, still based on CY23F P/E of 18x (5-year mean). Its FY23F P/E of 13.2x is 29% (-0.7 s.d.) below its 5-year mean. Potential rerating catalyst: healthy 3-year core EPS CAGR (FY21-24F) of 12.8%. Key downside risks: weaker-than-expected pharma sales and higher-than-expected input costs.

CHC sales held up nicely in 1H22 and into Jul-Aug 22

● Consumer healthcare (CHC) revenue rose marginally yoy to c.RM81m (22% of total) in 1H22, with flattish sales mom (even for vitamin C) into Jul-Aug 22. This surpassed DBB’s expectations (in line with ours), as it had expected CHC sales to taper yoy from FY21’s high base (Covid-19-led demand for immunity-boosting products) as Covid-19 turns endemic. Thus, we believe CHC will be a more meaningful revenue and earnings driver for DBB over the medium term, given the structural demand growth (local CHC market is still fairly under-penetrated) and DBB’s strong brand recognition. We learnt that Champs, DBB’s key children CHC brand, has been tracking comfortably as the leading brand for children’s vitamin C supplements in Malaysia in the past year, having overtaken its key competitor – Appeton from Kotra (KTRI MK, NR).

Ethical sales may wane hoh in 2H22F, with some export recovery

● Ethical classic segment revenue rose strongly yoy to c.RM202m (55% of total) in 1H22, as demand from both the public and private sectors normalised to pre-pandemic levels, aided further by inventory restocking by hospitals, clinics and pharmacies postmovement control orders. Meanwhile, ethical specialty sales were mixed, with lower sales for diabetes products offset by double-digit yoy growth for renal and oncology products. DBB expects overall ethical sales to soften slightly hoh in 2H22, as monthly sales have eased into Jul-Aug after the inventory restocking waned. This is in line with our forecast for local sales to dip by mid-single-digits hoh (up yoy) in 2H22F.

● Export revenue (-3.6% yoy, +25.1% qoq) continues to be challenged by supply chain and logistical issues such as elevated freight rates (have eased but still far above preCovid-19 levels) and limited vessel availability. Furthermore, DBB diverted some manpower from exports to focus on local supply amid the recent drug shortages. It sees a mild recovery hoh in 2H22F for exports (largely in line with our estimates), as new tender wins in ASEAN cushion soft sales elsewhere (e.g. Middle East, Africa).

Potential cost pressures partly mitigated by price increases

● While prices of active pharmaceutical ingredients (APIs) have somewhat stabilised, DBB expects c.1-2% pts dilution to its gross profit (GP) margin from higher input costs if the RM/US$ remains weak in the coming quarters. Nonetheless, cost increases will be partially passed on to both the private (progressive price increases for selected CHC/ethical products) and public (non-approved product purchase list [APPL]) sectors. We believe our projection for the GP margin to contract from 1H22’s 44.2% to 41.3% for FY22F already sufficiently reflects the impact of potential input cost pressures and higher mix of insulin sales to the government (lower margin) in 2H22F.

Source: CGS-CIMB Research - 5 Sep 2022