• We initiate coverage with Add and RM4.76 TP (13x CY23F P/E) on Kotra, a leading Malaysia-listed OTC supplements manufacturer by our estimates.
• We like Kotra for Appeton’s strong brand, industry-leading ROE, balance sheet and management quality, plus lowest CY23F P/E in the sector.
• Kotra is a proxy for OTC/ethical drug spending growth locally and globally.

A leading Malaysia-listed manufacturer of OTC supplements

Listed on the Main Market of Bursa Malaysia, we estimate Kotra is the second-largest locally-listed manufacturer of over-the-counter (OTC) pharmaceutical products by CY21 revenue. OTC products (Appeton brand) made up c.60-65% of FY6/21 revenue. It also produces generic ethical (prescription) drugs in various dosage forms, which formed the remaining c.35-40% of sales. It operates two production facilities in Melaka, Malaysia.

Attractive proxy for growth in OTC and ethical drug spending

Out-of-pocket spending on private pharmacies in Malaysia should rise further due to improving affluence and health awareness. Local generic ethical drug sales may also continue to grow, as generics made up only c.45-50% of total ethical sales at end-2018 (UK/US: >75%) and are priced 3x lower than foreign originators on average. Kotra is a key beneficiary, with its good brand and production capacity utilisation of only c.35-40%.

More upside from export markets; weak ringgit is a slight benefit

Kotra aims to deepen its presence in existing export markets, particularly ASEAN and Africa, by expanding its product portfolio and bidding for more government tenders. We see the gradual reopening of borders and easing of supply chain/logistical issues sequentially lifting export sales in FY23F, aided slightly by the weak RM/US$.

Strong brand recognition; highest ROE in the local pharma sector

We believe Kotra’s competitive advantage lies in its strong Appeton OTC brand, built via i) sizeable, sustained and strategic advertising & promotion investments, and ii) use of analytics capabilities to plan/evaluate marketing campaigns. This has allowed it to garner better pricing power, with its products priced at a 5-89% premium to comparable products from peers, as our per channel checks. We think this has led to its superior ROE (CY23F: 20.9%) vs. the Malaysian pharma sector (average: 14.6%; includes Apex Healthcare).

Initiate with Add and a target price of RM4.76

We initiate coverage with Add and RM4.76 TP, based on 13x CY23F P/E (10% below CGS-CIMB’s Malaysia pharma sector 5-year mean, to reflect lower trading liquidity). We advise investors to look past the FY23F EPS blip and accumulate the stock for its strong brand recognition, industry-leading ROE, balance sheet strength (end-FY22 net cash: 56 sen/share) and management quality. Kotra’s CY23F P/E is also the lowest in the local pharma sector (1.0 s.d. below sector mean) with decent FY23-25F yields of 3.9-4.8% p.a. Downside risks: softer-than-expected consumer spending and a sharp rise in input costs.

Source: CGS-CIMB Research - 12 Sep 2022