Results

1Q13’s revenue of RM500.3m (+12.0% yoy, +3.7% qoq) was translated into a core net profit of RM24.8m (-13.6% yoy, +94.2% qoq), accounting for 35.4% of our full year forecast.

We consider this as within expectations because 1Q is traditionally the strongest within the year (1Q12 core net profit of RM28.7m accounted for 35.0% of FY12).

Deviations

• Largely in line.

Dividends

• Declared first interim single tier dividend of 7.5 sen per share (1Q12: 7.5 sen) with an ex-date of 30th May.
• Committed to at least sustain FY12’s 35 sen dividend to be distributed quarterly.

Highlights

In a separate announcement, the Board updated that the status of the MOU in relation to the proposed acquisition of PTEP (Indonesian plant) remains unchanged as the negotiation is yet to be concluded.

Top line growth continued to be driven by the demand from both government hospitals under the concession agreement and private sector.

EBITDA was flat yoy which yielded a 1.3-ppt drop in margin to 10.9% mainly due to doubtful debts provision and lower gross profit margin as a result of higher direct overheads from Logistics and Distribution Division. As for qoq, EBITDA would have grown 36.3% yielding a margin of 8.3% after one-off adjustments amounted to RM14.9m.

However, EBIT contracted by 11.8% yoy to RM40.7m mainly due to amortization of IPMSB novation agreement which amounted to RM6.9m per quarter (RM52.0m over 22 months) started in 2Q12 and to end in Jan 2014.

Notably, Pharmaniaga successfully rationalized its inventory level resulted in a reverse elimination effect and recognition of RM18.4m profit. Thus, this should effectively bring down the unrealized profit on goods supplied by IPMSB to Logistics from RM29.4m to RM11.0m in the form of stock.

Catalysts

Gaining market share in non-concession and private sectors, synergistic benefits from acquisition, favorable FOREX, 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: RM10.92

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

Valuation

We reiterate our BUY call on the stock after rolling forward our valuations resulting in 19.1% rise in our TP from RM9.17 to RM10.92 based on unchanged 12.5x FY14 P/E multiple.

Although share price has performed well since our initiation, we continue to like the stock as there are numerous catalysts in sight, including manufacturing arm expansion in Indonesia, corporate exercises (share split and bonus issue), opportunity in private sector as well as decent quarterly dividend yield.

Source: Hong Leong Investment Bank Research - 16 May 2013