Results

• 1HFY15 turnover of RM984.7m was translated into core net profit of RM19.8m, making up 47% and 49% of ours and consensus full year estimates, respectively.

• We consider this as within expectations as 2Q is normally weaker compared to 1st quarter. Historically, 1H represents 45%-56% of full year earnings.

• One-off adjustments:
• 

Deviations

• In line.

Dividends

• Declared second interim dividend of 7.0 sen per share (vs. 2Q14: 4.0 sen and 1Q15: 7.0 sen), YTD of 14 sen accounted for 47% of our DPS estimates. Ex-date on 1-Sept-15, payment on 15-Sept-2015.

Highlights

• 1HFY15 sales decreased marginally by 0.9% yoy from RM993.7m to RM984.7m due to lower demand in the concession segment. Its PBT on the other hand, improved 1.4% to RM63.7m vs. RM62.8m in 1HFY14 attributed to higher profit margin from manufacturing segment.

• Logistics and distribution segment charted lower revenue of RM509m (-2.4% yoy) and suffered a loss before tax of RM1.3m caused by lower orders from the government coupled with higher expenses and amortization from PhIS.

• Thanks to its economies of scale which reduces its manufacturing costs as well as higher profit margins, Pharmaniaga’s manufacturing division achieved higher PBT of 15% yoy.

• 2QFY15 sales ratio of concession: non-concession: Indonesia business remains the same as 1QFY15 of 55%: 20%: 25%.

• We believe the group should 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.

• In accordance with the general market, Pharmaniaga’s share price has plummeted 19% to RM5.65. With potential upside of 23% excluding its dividend return of 5.3%, we upgrade the stock to BUY.

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 pending an update from management.

Rating

BUY, TP: RM6.93

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

• We upgrade the stock to BUY with unchanged TP of RM6.93 based on unchanged FY16 P/E multiple of 15.8x, 15% discount to US peers (see Figure #6).

Source: Hong Leong Investment Bank Research - 18 Aug 2015