Results

Although it accounted for 75.9% of our full year forecast, 9M13’s core net profit of RM53.1m (-37.0% yoy) which was generated on the back of RM1,378.8m sales (+3.7% yoy), is considered to be slightly below expectations.

Deviations

Weaker-than-expected sales growth in concession business.

Dividends

Declared third interim single tier dividend of 3.0 sen per share (3Q12: 4.55 sen) with ex-date of 2nd Aug. This elevates YTD DPS to 9.82 sen per share or 2.0%.

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

Highlights

3Q13 revenue gained 3.4% yoy but was relatively flat qoq mainly lifted by stronger contributions from the private sector and Indonesian operations, while concession business was relatively flat due to slow uptake from government hospitals as a result of budget reviews. However, Pharmaniaga expects a surge in demand in 4Q13 as hospitals received fresh budget allocation in October.

9M13 EBITDA of RM117.8m (-19.7% yoy) yielded a 2.5-ppt drop in margin to 8.5% mainly due lower gross profit and higher operating expenses from Logistics and Distribution Division, which actually recoded a LBT of RM3.4m in 3Q13.

9M13 EBIT contracted further by 35.6% yoy to RM70.1m 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.

With the newly awarded EU certification, Pharmaniaga is confident in securing drug manufacturing contracts from European pharmaceutical companies.

Pharmaniaga will maintain prudent risk management practices along with core business market strategies to mitigate the seasonal market forces which may result in downward pressure on domestic demand.

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

Tweaked model based on deviation mentioned above. As a result, FY13-15 EPS were revised downward by 6.7%, 9.8% and 9.1% respectively.

Rating

BUY, TP: RM5.19

Positives - Synergy from acquisition, quarterly dividend, secured business outlook thanks to CA.

Negatives - FOREX, high level of stock and gearing.

Valuation

Maintain BUY call on the stock even though we have cut our fair value by 2.4% from RM5.32 to RM5.19 based on higher FY14 P/E multiple of 14.5x (previously 13.4x), 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 Nov 2013