Highlights

• From the information gathered in our recent company visit, we remain positive on its business strategy and industry outlook, for both its domestic and regional division. Below are the key takeaways from the meeting.

• 2014 highlights. In the process of obtaining the Halal and ISO certification for three of its manufacturing plants. Also plans to attain European Union Good Manufacturing certification for its Bangi and Sri Iskandar plant. We believe this should provide the company with a stronger footing in the European market.

• Teaching Hospitals. As stated in our previous reports, Pharmaniaga entered into an agreement with three teaching hospitals (Hospital University Sains Malaysia, Hospital University Kebangsaan Malaysia and University Malaya Medical Centre) to supply about 600 pharmaceutical products to MoHE. We estimate that the supply agreement with the teaching hospitals should contribute circa RM240m or 13% addition to Pharmaniaga’s revenue. Although margin is lesser when compared to Government Concessions, volume growth should be sufficient to offset the lower margin for the concession from institutions.

• Pharmacy Information Systems (PhIS). Full impact of the higher costs from PhIS implementation could be seen from FY2016 onwards.

• PT Errita Pharma. After housekeeping, Pharmaniaga’s Indonesian arm, PT Errita Pharma is expected to breakeven in FY2015 (recorded a loss of RM2.9m in FY14). We believe the group would be able to benefit from the Indonesian market as it represents one of the most populated countries in the world.

• The JV in Kingdom of Saudi Arabia (KSA) with Modern to develop a greenfield manufacturing plant is on track, with capex of circa RM60m over 5 years. Targeting to commercialize in year 2019.

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

• Updated model with the latest pharmaceutical data and the contribution from MoHE. As a result, FY15, FY16 and FY17 EPS were raised upwards by 1%-13%.

Rating

BUY , TP: RM6.58

Positives

• Synergy from acquisition, quarterly dividend,secured business outlook thanks to CA as well as defensive and growing business .

Negatives

• FOREX, high level of stock and gearing.

Valuation

• Maintain BUY with higher TP of RM6.58 (from RM6.21 previously) based on unchanged FY16 P/E multiple of 15x, 15% discount to US peers

Source: Hong Leong Investment Bank Research - 25 Mar 2015