Highlights

Adventa is involved in three main businesses namely, (1) distribution of healthcare products (supply of hospital consumables and supply chain management) under Sun Healthcare (M) Sdn Bhd; (2) commercial sterilisation and warehousing of hospital supplies and specialist medical products under Electron Beam Sdn Bhd; and (3) home renal dialysis treatment via the provision of equipment, supplies, nursing care, monitoring, and laboratory test management under Lucenxia (M) Sdn Bhd.

In November 2012, the group divested its previous core business in glove manufacturing, switching to new growth sectors as a medical industry related service provider.

Against a low base of comparison and assuming smooth implementation and execution of new businesses and expansion plans, Adventa is expected to post sharply higher revenue and earnings going forward.

Risks

Successful roll-out of the new and projected high-growth home renal dialysis business is in part dependent on the government’s support in providing subsidies to patients requiring the treatment given the high average costs of RM3,200 per patient per month.

Potential foreign exchange fluctuations with the importation of machinery and equipment parts.

Forecasts

New coverage.

Rating

BUY / INITIATION

Positives –

(1) First-mover advantage in home renal dialysis treatment and almost monopolistic position in commercial sterilisation & warehousing activities within Asia;

(2) Relatively high barrier to entry for potential competitors due to high cost of machinery and technological know-how; and

(3) Sustainable longer-term growth prospects given increasing exposure to niche healthcare segments.

Negatives –

(1) Strong projected group revenue and earnings growth rates are highly reliant on successful implementation and execution of the new home renal dialysis operations;

(2) High working capital requirements estimated for new equipment build and business expansion; and

(3) The shares are tightly held currently, resulting in relatively low trading volumes.

Valuation

Initiate coverage on Adventa with BUY and TP of RM1.40/share, based on FY10/15 PER of 18x, which is at a 30% discount to Asian healthcare players.

We believe the discount is justified given Adventa’s relatively small size at the moment, and the stock’s lack of share liquidity.

Source: Hong Leong Investment Bank Research - 3 Mar 2014