Highlights

Pharmaniaga has just concluded a two-day tender exercise held at its premises last week.

Under its 10-year concession agreement, Pharmaniaga is responsible to procure, supply and distribute both pharmaceutical and non-pharmaceutical products to all healthcare facilities under the purview of Ministry of Health (MoH) until November 2019.

This tender was meant to facilitate the price negotiation with MoH which is renewable every 3 years and the next revision is slated to be in early 2014.

The tender process was held in a transparent manner and monitored by officials from MoH, an auditing firm and the chief integrity officer from its parent company, Boustead Group.

172 vendors who participated in the tender were briefed on the process before submitting their quotations.

MoH will determine the winners and contract awards will only follow after 6 months, which is the timeframe required to examine all the products submitted by the vendors in the bidding process.

MoH would need to vet and scrutinize each and every product thoroughly as a wrong pick of a medicine can be detrimental to some 27m Malaysians.

Pharmaniaga shared that the expected total contract value of this tender exercise has swelled to RM3bn, compared previous’ RM1bn.

Comments

This development is in sync with our positive outlook on the sector which eventually bodes well for Pharmaniaga.

Recall that its FY12’s concession revenue grew remarkably by 18.3% yoy to surpass the RM1bn mark for the first time.

Aggregating the expected contract value of RM3bn over 3 years, it is safe to assume that Pharmaniaga’s concession business is bound to secure minimum of RM1bn sales per annum. Moreover, based on history, concession revenue tends to be more than the total value of awarded contracts due to higher demand.

Generally, concession business yields a margin of 10%-15%. If Pharmaniaga wins more contracts in this tender, this will allow it supply more in-house drugs (currently only 40% of sales) which command much higher margins of 30%-40%.

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 - 23 Sep 2013