Results

1Q14 turnover of RM468.7m was translated into core net profit of RM28.0m, accounted for 30% and 33% of HLIB and consensus full year estimates, respectively.

This is regarded as within expectations because 1Q is traditionally a strong quarter within its financial year (1Q13 core net profit of RM30.7m accounted for 40% of FY13).

Deviations

In line.

Dividends

Declared first single tier dividend of 4.0 sen per share (1Q13: 3.41 sen) with ex-date of 29th May.

Committed to at least sustain FY13’s dividend to be distributed quarterly.

Highlights

1Q14 turnover weakened by 6.3% yoy and 17.5% qoq to RM468.7m due to reduced demand from both the concession and non-concession businesses.

1Q14 sales ratio was relatively unchanged with concession: non-concession: Indonesia business at 59%: 20%: 21% vs. FY13’s 58%: 21%: 21%, while it continues to reduce dependency on concession business progressively.

EBIT margin gained 2.2-ppt to 8.4% as it graduated from the amortization of novation agreement in Jan 2014 which amounted to ~RM2.3m per month.

Logistics and distribution division is set to generate a steady revenue stream while maintaining cost optimization measures to sustain earnings growth, though this may be moderated by the implementation of Pharmacy Information System (PhIS). Manufacturing division remains steadfast in R&D with a view to expand product portfolio.

The recent closure of ERRITA deal is expected to have a positive impact as it strives to expand its earnings base and pursue viable growth opportunities. We expect ERRITA to contribute positively over the long term as new product registration process in Indonesia would require up to 2 years.

With regard to the recent frenzied mega M&A among global pharmaceutical players (involving GSK and Novartis, Pfizer and AstraZeneca, Merck and Bayer, etc), Pharmaniaga sees neutral impact to Malaysian market.

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

Maintained.

Rating

BUY, TP: RM5.30

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

Negatives - FOREX, high level of stock and gearing.

Valuation

Reiterate BUY with unchanged fair value of RM5.30 based on FY15 P/E multiple of 14.5x, on par with US peers.

Source: Hong Leong Investment Bank Research - 15 May 2014