Results

• Below expectations - 1Q16 turnover of RM559.2m was translated into core net profit of RM19.9m, which accounted for 16% and 17% of HLIB and consensus FY16 forecasts, respectively.

Deviations

• Below expectations due to higher finance costs, higher amortization for its Pharmacy Information System (PhIS) and moderate government orders.

Dividends

• Declared first interim dividend of 4.0 sen/share (vs. 7.0 sen/share in 1QFY15). Ex-date 1-Jun-16, payment date on 28-Jun-16.

Highlights

• 1Q16 sales increased 18.5% yoy but dropped 17.8% qoq to RM559.2m due to lower demand from the concession segment. Due to higher amortization costs from PhIS and higher finance costs, both PBT and PATAMI charted negative growth of 31.3% and 42.2%, respectively.

• Heavily affected by higher amortization costs as well as lower than expected government orders, Pharmaniaga’s Logistics and Distribution division continue to disappoint. It posted lower PBT yoy and qoq, declining 92.3% and 67%, respectively, to RM0.8m.

• Its Manufacturing division PBT, on the other hand, improved marginally by 1% yoy and 27% qoq to RM32.4m. The improvement was mainly on the back of lower research and development costs as well as reduced operating expenses.

• We still expect the Indonesian operations and teaching hospitals to benefit Pharmaniaga in the long run. However, the amortization cost from PhIS implementation would continue to dampen the group’s bottomline.

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

• Based on the deviations stated above, we cut our FY16- FY17 forecasts by 11% - 12%.

Rating

• HOLD , TP: RM5.78

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 our HOLD call with lower TP of RM5.78 (previously RM6.52) as we factor in lower earnings forecasts and higher amortisation based on FY17 P/E multiple of 15.8x, equal to the US peers (see Figure #6).

Source: Hong Leong Investment Bank Research - 16 May 2016