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• Proposed to acquire 1,400,000 ordinary shares in Bio- Collagen Technologies Sdn Bhd (BCTSB), which represents 70% of total issued and paid-up share capital of BCTSB for a total cash consideration of RM3.5m.

• We understand that the acquisition would be funded entirely by cash. As of 30th June 2015, Pharmaniaga has cash of RM15.3m. Thus, it would not be an issue for Pharmaniaga to fund the acquisition.

• The acquisition is estimated to complete by the next quarter, 3QFY15.

• Bio-Collagen Technologies, as the name suggest, is principally engaged in research and manufacturing of halal collagen medical, devices (dressings) for wound management application and other products and medical devices for pharmaceutical industry.

• We are neutral on the acquisition as earnings contribution would not kick-in as early as we expected. However, we believe it would be good for the group in the long term as collagen is increasingly being used for cosmetic and medical purposes, which aids in healing and repairing of body tissues.

• Management believes that the newly acquired business would be able to complement its current core business. Expect to benefit by being the first mover for collagen-based medical dressings in Malaysia, with access to international markets such as China and SEA countries.

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 a meeting with the 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

• Maintain BUY with unchanged TP of RM6.93 based on unchanged FY16 P/E multiple of 15.8x, 15% discount to US peers (see Figure #1).

Source: Hong Leong Investment Bank Research - 1 Sep 2015