Results

2QFY14 results came in below our expectations with 1HFY14 revenue and earnings accounting for only 35-40% of our previous full year forecast.

Deviations

Lower-than-expected contributions from the healthcare products and sterilisation provider segments.

Dividends

None (1QFY14: none).

Highlights

2QFY14 revenue and earnings registered double-digit declines on a YoY and QoQ basis, due to the deferral of customer orders to following quarters at the healthcare products division, as well as maintenance works performed on sterilization equipment to cater for increasing demand at the sterilization provider segment.

1HFY14 revenue declined by 10% YoY on account of the softer performances at both the healthcare and sterilization divisions in 2QFY14. At the earnings level and excluding the one-off RM196.4m gain on disposal of the glove-making operations in 1QFY13, earnings increased by double-digit, reflecting lower operating expenses.

Risks

Successful roll-out of the new and projected high-growth home renal dialysis business (now slated for 1QFY15) is dependent on a smooth transition of patients from hospitals and private treatment centres to home treatment. Management indicated that ongoing trials have been expanded to 7 locations nationally to fully stress-test and prove the system’s competency. As a result, commercial introduction to the market has been deferred to 1QFY15 rather than 4QFY14 as earlier announced.

Forecasts

We have downgraded our forecasts by 8-15% largely to reflect delayed commencement of the upcoming home renal dialysis operations.

Rating

Buy, TP: RM1.30

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 rivals 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 lower fair value of RM1.30, based on unchanged FY10/15E PER of 19x, which is at a 26% 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 Jun 2014