Results 

9MFY14  recorded  revenue  of  RM23.1m,  which  was translated into  a  core net profit of  RM3.2m. This accounts for 70.3% of our full year forecast.

We  consider  the  results   to  be  within  expectations  as  we expect a stronger  fourth  quarter  ahead.

Deviations 

• Largely  in line.

Dividends 

• None  (3QFY13: None).

Highlights 

3QFY14  revenue  registered  double-digit  growth  on  both  YoY and  QoQ  basis  (+38.8%  yoy,  +71.0%  qoq).  Filtering  down, earnings  increased by 4.7% yoy and 2.4 folds qoq.

Healthcare  products  segment:  Revenue  improved  by  36% yoy  to  RM7.1m  (3QFY13:  RM5.2m),  contributed  by  deferral of  customer  orders  from  previous  quarter,  improving  sales  of existing products as well as addition  of new  products.

Sterilisation provider segment:  Revenue grew  by  45%  yoy to  RM3.0m  (3QFY13:  RM2.0m).  The  solid  growth  was achieved  thanks  to  upgrading  works  done  last  quarter  which allows  for  greater  flexibility in services  offered.

9MFY14  revenue  increased  by  6.4%  yoy,  backed  by  better performance  in  both  the  segments.  Excluding  the  one-off disposal  gain  of  RM196.4m  in  1QFY13,  earnings  show contraction,  reflecting  higher  operating  expenses  incurre d  in the home dialysis business where  trials are still ongoing.

Understand  that  the home renal dialysis  business  is pending MOH’s   approval  which  may  be  announced  in  Nov/Dec.  We expect earnings  to be registered  from  1QFY15 onwards.

Risks 

Successful  roll-out  of  the  new  and  projected  high-growth home  renal  dialysis  business   (slated  for  1QFY15)  is dependent  on  a  smooth  transition  of  patients  from  hospitals and  private  treatment  centres  to  home  treatment.  T rials  are ongoing  with  further  investments  on  patient  care  education and training as well as extending reach into rural regions.

Forecasts 

• Unchanged.

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  segment s.

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. 30,  based on  FY10/15E  P/E  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 lack of share liquidity .

Source: Hong Leong Investment Bank Research - 26 Sep 2014