Highlights

We continue to like the growth prospect of Pharmaniaga supported by positive industry outlook such as higher government healthcare expenditure, population growth, ageing demographics and expiry of blockbuster drugs.

In FY12, group’s revenue expanded impressively by 19.2% yoy as all business segments registered double-digit growth. Government concession business remained as the major contributor with 59.0% of total sales, grew 18.3% yoy on the back of more effective and efficient distribution network, closing the demand gap. Furthermore, this also resulted in significant reduction in unfulfilled order penalty.

Notably, Pharmaniaga met their target in elevating the private sector contribution from 3.8% to 5.8% whereby sales grew a commendable 78.9%. Private sector will be the main driver of the firm’s domestic growth as it only commands a small market share, thus great potential for growth and margin expansion.

Although there is no dividend policy, but the company hopes to at least sustain FY12’s 35 sen dividend to be distributed quarterly. With this, yield is still pretty decent at 4.2%.

No impact due to the implementation of minimum wage policy as this was already adopted in 2011.

The only undesirable development that we gathered is the delay of their Indonesian expansion, which we anticipated to be closed by end of FY12 / early FY13, is still in the midst of shortlisting process. However, we strongly believe that Pharmaniaga remains committed and has prioritized this as the main driver to fuel the company’s future growth.

Manufacturing revenue was lower in 4Q12 mainly due to plant closure for scheduled maintenance.

Corporate exercise (share split and bonus issue) is slated to complete by 2Q13. Currently, this is subject to shareholders’ approval in forthcoming EGM on 3rd April.

Catalysts

Gaining market share in non-concession and private sectors, synergistic benefits from acquisition, continuous effective operational strategy.

Risks

Political/regulatory/competitive/FOREX risks, failure/delay in drug delivery under CA, compliance to production standards/contamination and drug patent disputes.

Forecasts

Toned down our earnings forecast mainly due to delayed expansion of Indonesian operation, higher amortization and higher elimination due to inventory. As a result, FY13-15 EPS were trimmed by 23.5%, 22.3% and 24.2% respectively.

Rating

BUY, TP: RM9.17

• Positives - Synergy from acquisition, quarterly dividend, secured business outlook thanks to CA.
• Negatives - FOREX, high level of stock and gearing.

Valuation

We remain our BUY call on the stock although TP has been cut by 5.6% to RM9.17 from RM9.71 pegged at unchanged P/E multiple of 12.5x average FY13-14 earnings.

We believe this valuation methodology would better reflect the fair value of the company as FY13’s earnings will be impacted by accelerated amortization of the novation contract, which is a non cash item.

Source: Hong Leong Investment Bank Research - 28 Mar 2013