Results

• Adventa FY15 revenue of RM41.9m met our expectations (99% of our full year forecasts). However its PATAMI, which declined 29% yoy to RM3.1m was largely below our expectations, accounting for 54% of our FY15 forecasts.

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

• Adventa recorded a 20% rise yoy in turnover. Overall PBT plunged 25% yoy purely resulting from weaker Ringgit and higher expenses in purchases and maintenance from sterilisation provider segment.

• Healthcare products segment: 4QFY15 revenue dropped 8% yoy but increase 17% qoq. The lower revenue was attributed from slower uptake by hospitals for certain disposable products. Thanks to higher sales volume compared to 4QFY14, EBIT improved 140% yoy. The group recorded RM7.3m (vs. 7.9m in 4QFY14) in revenue and RM0.2m (vs. loss of RM0.4m in 4QFY14) in EBIT for its 4QFY15.

• Sterilisation provider segment: Sales decreased 2% and 20% qoq and yoy, respectively. EBIT also charted negative growth qoq and yoy. Weak performance for sterilisation segment was due to lower volume arising from scheduled maintenance period as well as weak Ringgit which translates into higher system maintenance cost and lower margin for the group.

• Most of its supplies and equipment are purchased in US Dollar. To curb the weaker Ringgit effect on the group’s earnings and increase margins, management plans to increase prices of its medicinal supplies and products.

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. Trials are ongoing with further investments on patient care education and training as well as extending reach into rural regions.

Forecasts

• Cut forecasts by 46%-47% to take into account higher expenses and the deferred contribution from Home Dialysis business.

Rating

• HOLD , TP: RM1.02

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 a higher TP of RM1.02 as we roll forward our valuations to CY16 based on CY16 P/E of 19x, which is at a 25% discount to Asian healthcare players.

Source: Hong Leong Investment Bank Research - 21 Dec 2015