Results

1QFY14 turnover of RM7.1m was translated into core net profit of RM4.1m, accounted for 30.6% of our full year forecast. However, we would consider this as largely in line.

One off adjustments during the quarter included PPE writeoff amounted to RM129k and FOREX loss of RM2k.

Deviations

Largely in line.

Dividends

None (1QFY13: none).

Highlights

1QFY14 revenue doubled from a year ago thanks to rapid growth in the sterilization services and medical supplies business. Sequentially, sales also grew remarkably by 25.3% as in hospital supplies segment including increasing exports and regional supplies improved.

However, 1QFY14 PBT fell due to the recognition of disposal gain amounted to RM196.3m in 1QFY13. Excluding that, PBT would have grown by 7.7% yoy.

Adventa shared that sterilisation services has gained new customer accounts that will yield higher income from its available capacity. Capacity utilization has improved from 40% to 47% in 1QFY14.

The ongoing trials and premarket studies for home peritoneal dialysis is progressing well and on track for launch the service in 4QCY14.

Risks

Successful roll-out of the new and projected high-growth home renal dialysis business (slated for Sept 2014) is dependent on a smooth transition of patients from hospital and private treatment centres to home treatment. The government’s support in providing subsidies to eligible patients would also help, given the high average cost of RM3,200/patient per month.

Forecasts

Unchanged.

Rating

Buy; TP: RM1.40

Positives –

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

(2) Relatively high barrier to entry for potential rival 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

Reiterate BUY with unchanged fair value of RM1.40, based on FY10/15E 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 - 26 Mar 2014