Deviations

• Below expectations due to higher amortization for its Pharmacy Information System (PhIS) and lower than expected government orders.

Dividends

• A fourth interim dividend of 7.0 sen/share (vs. 4Q14: 12 sen) was declared. This brings our full year DPS to 30 sen, broadly in line with our DPS estimates of 29.7 sen. Ex-date on 1-Mar-16, payment on 25-Mar-16.

Highlights

• FY15 sales increased 3.1% yoy to RM2189.3m mostly contributed by private sector business and its Indonesian operations. However, due to higher amortization costs from Pharmacy Information System (PhIS) and lower government orders, PBT declined 10.4% to RM112.5m.

• Logistics and distribution segment also registered lower PBT of RM12.3m vs. RM40m in FY14. Total amort ization costs were exceptionally higher, with the bulk of it coming from pHIS (Pharmacy Information System) of RM26.4m. Low government orders, higher promotional and distribution expenses also contributed to the decline in PBT

• The star of the quarter, Pharmaniaga’s manufacturing division charted higher PBT by 17% (FY15: RM109.5m vs. FY14: RM93.7m) resulting from better productivity and efficiency as well as cost management.

• We expect the group to benefit from their Indonesian market and teaching hospitals. However, we believe the full impact of higher costs from its PhIS implementation could be seen from FY2016 onwards, which may hurt its earnings slightly. The recent Budget 2016 recalibration (OPEX cut of RM4bn) may also involve reduction in allocation to the Ministry of Health.

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

• FY16-FY17 forecasts were cut by 7%-10% as we take into account the deviations stated above.

Rating

HOLD , TP: RM6.52

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 downgrade to HOLD with lower TP of RM6.52 (previously RM6.93) as we factor in lower earnings forecasts and roll forward our valuation, based on FY17 P/E multiple of 15.8x, equal to the US peers (see Figure #6).