Results

Solid 2Q14 boosted 1H14 turnover to RM993.7m which was translated into core net profit of RM51.0m, accounted for 55% and 59% of HLIB and consensus full year estimates, respectively.

This is within our expectations due to traditionally stronger 1H (1H13 core net profit of RM42.1m accounted for 54.8% of FY13), but slightly ahead of street’s estimates

Deviations

In line.

Dividends

Declared 2nd single tier dividend of 4.0 sen per share (2Q13: 3.41 sen) with ex-date of 5th Sept.

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

Highlights

2Q14 turnover gained by 20.0% yoy and 12.0% qoq to RM525.1m due to stronger demand from both the concession and non-concession businesses.

EBIT more than doubled while margin gained 2.4-ppt to 5.3% as it graduated from the amortization of novation agreement in Jan 2014 which amounted to ~RM2.3m/month.

However, qoq sales growth was not reflected on earnings as operating expenses mounted. We believe this is due to the cost associated with implementation of Pharmacy Information System (PhIS) as guided in 1Q14.

Continue to see positive outlook as pharmaceutical sector in Malaysia is showing improved prospects.

The recently acquired ERRITA is expected to contribute positively towards its long term earning, as it concentrated on exploring new viable business opportunities to broaden its earnings base as well as sustain profitability.

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, a 10% discount to US peers (see Figure #6).

Source:Hong Leong Investment Bank Research - 22 Aug 2014