Results

• Adventa 1HFY15 revenue of RM22.4m met our expectations (53% of our full year forecasts), while its PATAMI of RM1.5m was below our expectations, coming in at 21% of our FY15 estimation.

Deviations

• Due to higher operating expenses from Home Dialysis business, higher import cost due to weakening of RM and maintenance of equipment for Adventa’s sterilisation provider division.

Dividends

• None.

Highlights

• For its 1HFY15, Adventa posted 72% increase in sales yoy. PBT on the other hand was 2% lower yoy mainly caused by higher costs incurred in purchases and maintenance (from sterilisation provider segment).

• Healthcare products segment: Achieved a whopping 127% increase in revenue yoy to RM8.6m from RM3.8m in 2QFY14. The huge leap was due to higher sales volume coming from the introduction of new products. Apart from servicing the public hospitals, Adventa plans to focus on the private segment. This should be positive for the group as private sector generally provides higher margin. Overall, we expect its market share in supplying hospital supplies to improve.

• Sterilisation provider segment: Its sales increased 24% yoy, but declined 3% qoq. This is attributed to its major upkeep / maintenance of equipment, thus slowing down its operation in 2QFY15. We expect sales to pick up 3Q onwards.

• Still positive on its Home Dialysis business. Expect to launch in Q4FY15. Hence we believe contribution from Home Dialysis should kick in 2016 onwards.

Risks

• Successful roll-out of the new and projected high-growth home renal dialysis business (slated for 4QFY15) is dependent on a smooth transition of patients from hospitals and private treatment centres to home treatment. Trials are ongoing with further investments on patient care education and training as well as extending reach into rural regions.

Forecasts

• Unchanged pending an update from the management.

Rating

HOLD , TP: RM1.00

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 segments.

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 and business expansion; and (3) The shares are tightly held currently, resulting in relatively low trading volumes.

Valuation

• Maintain HOLD with higher TP of RM1.00 (vs. RM0.90 previously), based on CY15 P/E of 19x, which is at a 25% 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 - 24 Jun 2015