Highlights

In its exchange filing, Pharmaniaga announced that it together with Glenn Rahyu Adli Ariff (current non-affiliated director of Pharmaniaga’s Indonesian logistic business) has inked a MOU with Sutjipto Tjengudororo and Hendrijanto Surjosuseno on 1st April 2013 in relation to the proposed acquisition of PT Errita Pharma (PTEP), an Indonesian generic pharmaceutical products manufacturer for an indicative purchase price of USD28.0m (RM86.2m), subject to any adjustment.

This joint proposed acquisition will result in Pharmaniaga holding 75% stake while Glenn will hold the remaining 25%.

The terms of the MOU are subject to the execution of a SPA within 30 days from the date of the MOU or other date required in writing failing which the MOU shall automatically lapse and have no further effect. Financial Impact

Pharmaniaga’s 75% stake will cost USD21.0m (RM64.7m) which may be a challenge as gearing will be elevated from 0.70x to 0.83x. However, the acquisition will boost future earnings and cash flow from Indonesia significantly.

Comments

We welcome this development optimistically as we believe this acquisition will complement its existing logistic arm synergistically, boosting its margins significantly.

Pharmaniaga may transfers its technical know-how and best manufacturing practice to enhance the efficiency of PTEP. Furthermore, it may easily introduce new generic drugs on the back of huge library of registered drugs.

However, drug registration process in Indonesia may take up to 2 years while non-drug related products (vitamins and health supplements) requires at least 6 months.

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

Unchanged.

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 maintain our BUY call on the stock with unchanged TP of RM9.17 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 - 03 Apr 2013