Results

1H13’s revenue of RM938.0m (+3.8% yoy) was translated into a core net profit of RM44.4m (-21.4% yoy), accounting for 63.3% of our full year forecast.

We consider this as within expectations because 1H is traditionally stronger within the year (1H12 core net profit of RM56.4m accounted for 62.6% of FY12).

Deviations

In line.

Dividends

As expected, declared second interim single tier dividend of 3.41 sen per share (2Q12: 3.41 sen) with ex-date of 30th Aug. This doubles up YTD dividend to 6.82 sen per share.

Committed to at least sustain FY12’s 15.9 sen dividend to be distributed quarterly.

Highlights

2Q13 revenue contracted 4.2% yoy and 12.5% qoq mainly due to a lower contribution from the government concession business which is cyclical in nature. However, Pharmaniaga expects a surge in demand in 3Q13 as hospitals received fresh budget allocation in July.

1H13 EBITDA of RM84.9m (-14.6% yoy) yielded a 1.9-ppt drop in margin to 9.1% mainly due high direct overheads from Logistics and Distribution Division.

1H13 EBIT contracted further by 30.6% yoy to RM53.4m 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.

Effective inventory rationalization has led to continuation of reverse elimination effect and recognition of RM11.8m profit in 2Q13 (RM18.4m in 1Q13).

Pharmaniaga has finally awarded with EU certification and it is confident in securing drug manufacturing contracts from European pharmaceutical companies.

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: RM5.32

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 upgrading our TP by 7.3% from RM4.96 to RM5.32 based on 13.4x (previously 12.5x) FY14 P/E multiple, on par with US generic manufacturers (see Figure #5).

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 and Saudi Arabia, drug manufacturing contracts on the back of EU certification, opportunity in private sector as well as decent quarterly dividend yield.

Source: Hong Leong Investment Bank Research - 19 Aug 2013