Results

• Adventa 9MFY15 revenue of RM31.8m met our expectations (75% of our full year forecasts), while its PATAMI of RM2.3m was below our expectations, coming in at 34% of our FY15 estimation.

Deviations

• Due to higher 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 9MFY15, Adventa posted 38% increase in sales yoy. However, its PBT declined 17% yoy mainly on the back of higher costs incurred in purchases and maintenance (from sterilisation provider segment) coupled with higher import cost.

• Healthcare products segment: The segment registered revenue of RM6.3m, which was 27% and 11% lower qoq and yoy, respectively. The lower turnover was attributed to the lower uptake from hospitals and pre-purchasing before GST implementation (reflected in a strong 2Q). Its EBIT was also affected by the higher import costs resulting from RM depreciation, charting a decline of 84% and 77% yoy and qoq, respectively. PBT was reduced by 78% yoy.

• Sterilisation provider segment: Its revenue performed relatively well, achieving sales of RM3.2m, 20% and 5% higher, qoq and yoy. Despite greater revenue, the maintenance of equipment impaired its profitability in the quarter, where PBT dropped 33% yoy.

• As stated by the management, its Home Dialysis business, the Clinical Review 2 has completed and is under review.

Risks

• Successful roll-out of the new and projected high-growth home renal dialysis business is dependent on a smooth transition of patients from hospitals and private treatment centres to home treatment.

Forecasts

• Cut forecasts by 12% -18% as we take into account higher costs as reflected in the latest results.

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 unchanged TP of RM1.00 as we switch from FY15 to CY15 EPS. P/E of 19x 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 low liquidity.

Source: Hong Leong Investment Bank Research - 23 Sep 2015