Highlights

Its wholly-owned subsidiary, Pharmaniaga International Corporation SB and PT Dasar Technologi (Dasar) had on 29 Aug entered into a Binding Agreement with Sutjipto Tjengudororo and Hendrijanto Surjosuseno for the proposed acquisition of PT Errita Pharma (Errita), an Indonesian generic pharmaceutical products manufacturer.

This joint acquisition which is expected to complete by 4Q13, will result in Pharmaniaga holding 75% stake while Dasar will hold the remaining 25%.

This involves a cash payment of USD18m and further assumption of liabilities with a cash payment of up to USD6m. Pharmaniaga will fund this acquisition by internally generated funds and / or bank borrowings.

Based on the unaudited financial statements for FYE 31 Dec 2012, Errita registered a net loss and net assets of approximately USD127k and USD4.78m respectively. The basis for the purchase consideration was arrived by reference to Errita’s net assets.

Financial Impact

Pharmaniaga’s 75% stake which cost USD18.0m (RM60.0m) is lower than previous estimate of USD21.0m

The acquisition price is derived based on 5x of Errita’s net asset compared with its current 0.91x of FYE12’s net assets.

Although the pro-forma effect (based on FYE 31 Dec 2012 audited balance sheet) will elevate gearing from 0.72 to 0.85 (largely in line with our previous forecast), the acquisition is expected to 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 (PT Mega Pharmaniaga) in Indonesia synergistically, boosting its margins significantly and create own branding.

With the huge population of close to 300m, Euromonitor projected that consumer spending in healthcare will expand at the CAGR of 13.7% from 2007 until 2015.

Pharmaniaga may transfers its technical know-how and best manufacturing practice to enhance the efficiency of Errita. 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, 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 BUY call on the stock on the back of unchanged fair value of RM5.32 based on unchanged 13.4x FY14 P/E multiple, on par with US generic manufacturers

Source: Hong Leong Investment Bank Research - 30 Aug 2013