Results

• 1Q15 turnover of RM471.9m was translated into core net profit of RM32.2m, making up 29% and 31% of ours and consensus full year estimates, respectively.

• We consider this as within expectations as 1Q has traditionally been a strong quarter for its financial year. Historically, 1Q usually represents 28%-46% of full year earnings for the past 4 years.

• One-off adjustments:
• 

Deviations

• In line.

Dividends

• Declared first single tier dividend of 7.0 sen per share (vs. 1Q14: 4.0 sen), accounting for 24% of our DPS estimates. Ex-date on 1-Jun-15, payment on 25-Jun-2015.

Highlights

• 1Q15 sales increased marginally by 0.7% yoy but declined 24.7% qoq to RM471.9m due to lower demand in the concession segment. Also, note that 4Q14 results went against the traditional trend of being the seasonally weakest quarter.

• 1Q15 sales ratio of concession: non-concession: Indonesia business was 55%: 20%: 25% vs. 1Q14’s 59%: 20%: 21%. Indonesia business contributed higher to the revenue, while Pharmaniaga continues to cut down dependency on its concession business.

• Logistics and distribution segment posted lower PBT of RM10.8m (-27% yoy) caused by lower orders from the government in 1Q15. Manufacturing division on the other hand, achieved higher PBT of 26% as a result of better profit margins, which we believe to be contributed by price hike in 2H14. It should enjoy the full impact of price increase in FY15.

• We anticipate the group to benefit from the Indonesian market as well as the teaching hospitals and expect it to contribute positively towards the group’s long term earnings. However, post FY15, earnings could be dragged down by the higher amortization costs from the PhIS implementation.

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

• Unchanged.

Rating

HOLD , 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

Given that share price has increased 57% YTD to RM6.91 we downgrade the stock to HOLD with unchanged TP of RM6.58 based on unchanged FY16 P/E multiple of 15x, 15% discount to US peers (see Figure #5).

Source: Hong Leong Investment Bank Research - 19 May 2015