Results

• 9MFY15 turnover of RM1509.2m was translated into core net profit of RM74.0m, which accounted for 67% and 71% of ours and streets’ full year forecasts, respectively.

• We deem this as within expectations as we expect better results in the next quarter. In the past 4 years, 9M generally represents 61% - 77% of full year earnings.

• One-off adjustments:
• 

Deviations

• In line.

Dividends

• A third interim dividend of 9.0 sen/share (vs. 3Q14: 8.0 sen) was declared. YTD DPS currently stands at 23 sen, equating to 77% of our DPS estimates. Ex-date on 9-Dec- 15, payment on 21-Dec-15.

Highlights

• 9MFY15 sales grew marginally by 0.9% yoy to RM1509.2m thanks to higher contribution from its Indonesia and nonconcession segment. PBT improved 1.5% yoy, while its PATAMI jumped 19% yoy due to lower effective tax rate of 23% resulting from over provision of deferred tax liability of RM2.4m.

• Logistics and distribution segment registered lower PBT due to higher amortization costs from pHIS (Pharmacy Information System) of RM0.39m as well as lower orders from the government. We believe demand from government hospitals should increase in the next quarter as hospitals need to build up stocks (medical products & drugs) before receiving a new budget in 2016.

• Pharma’s manufacturing division achieved higher PBT by 9% mainly due to lower manufacturing costs which showcased better economies of scale (better efficiency and productivity).

• 3QFY15 sales ratio of concession: non-concession: Indonesia business was 53%: 23%: 24% vs. 2QFY15 of 55%: 20%: 25%.

• The group should benefit from their Indonesian market, teaching hospitals and measures stated in Budget 2016 to supply medicines, consumables, vaccines and reagents to all government hospitals and clinics.

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

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 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 #6).

Source: Hong Leong Investment Bank Research - 27 Nov 2015