Highlights

• In its filing to the exchange on 13th February 2015, Pharmaniaga announced that its wholly-owned subsidiary, Pharmaniaga Logistics Sdn Bhd has entered into a Supply Agreement with Universiti Sains Malaysia (USM) to undertake the services of purchasing, storing, supplying and delivering to USM drugs and non-drugs approved by USM (Approved Products).

• The value of the Approved Products to be supplied to USM is not stipulated in the agreement. Hence, the total value of the agreement will depend on the actual volume, the agreed unit price of Approved Products and scope of services rendered from time-to-time during the agreement period.

• The agreement will commence from the even date, 13th February 2015 and end on 30th November 2019, a period of not more than 5 years.

Comments

• The supply agreement involves three university hospitals of USM with potential arrangement to supply disposable medical equipment and tools to USM.

• This could be a kick-start to a long-term partnership with USM as there is an opportunity of providing services to other university hospitals of USM as well as expanding the scope of services or products supplied.

• This also provides the opening for business opportunities with the rest of the university hospitals in Malaysia.

• At the same time, a Memorandum of Collaboration (MoC) was also signed between USM and Pharmaniaga Pristien Sdn Bhd to set up more pharmacies in Malaysia.

• The rationale of the MoC is to provide assistance to USM pharmaceutical students to enable them to open their own pharmacies.

• If the initiative turns out successful, this would potentially provide a new dimension in earnings base and further room for earnings growth.

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, 10% discount to US peers (see Figure #1).

Source: Hong Leong Investment Bank Research - 16 Feb 2015