Results

• Below expectations - Adventa’s 1QFY16 PATAMI of RM0.9m was below our expectations, accounting for 11% of our FY16 forecasts.

Deviations

• Resulting from weak RM and higher expenses from its Home Dialysis business.

Dividends

• None.

Highlights

• 1QFY16 revenue increased 10% yoy from RM11.2m to RM12.3m. Adventa’s PATAMI was also higher by 21% yoy to RM0.9m.

• Sterilisation provider segment: Although revenue improved 10% yoy, its EBIT declined 12% qoq and 16% yoy due to higher maintenance costs.

• Healthcare provider segment: 1QFY16 revenue charted positive growth qoq and yoy by 30% and 13%, respectively thanks to higher purchases from hospitals to stock up their hospital supplies. Also recorded huge growth for its EBIT, improving from RM0.1m to RM0.6m in the current quarter.

• Home Dialysis segment: To recap, Lucenxia INTELLIS was launched earlier this year (25th January 2016). Although the implementation of home dialysis business is not as smooth-sailing as first anticipated, we are still positive on this segment and expect contribution to flow from 2017 onwards.

• Management expects better cost saving in the future via its new logistics centre located in Subang.

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 21% based on deviations stated above. Also introduced 2017 forecast.

Rating

HOLD , TP: RM0.88

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 lower TP of RM0.88 based on CY16 P/E of 19x, which is at a 25% discount to Asian healthcare players.

Source: Hong Leong Investment Bank Research - 30 Mar 2016