Results

• Adventa recorded PATAMI of RM0.9m for its 1HFY16 results. This was below our expectations, making up 15% of our FY16 forecasts.

Deviations

• Due to lower revenue contribution from its distribution segment and high operating expenses from its Home Dialysis business.

Dividends

• None.

Highlights

• 1HFY16 revenue declined 3.2% yoy from RM22.4m to RM21.7m. PATAMI was also lower by a whopping 35% yoy.

• Sterilisation provider segment: The only performing segment. Sales improved 17.5% yoy while its EBIT increased 8.7% yoy.

• Healthcare provider segment: The budget cuts in the public healthcare sector impacted Adventa’s distribution segment tremendously. Both sales and EBIT dropped 24.6% yoy and 67.6% yoy, respectively.

• Home Dialysis segment: Its home dialysis is now commercially in operations. It recorded sales of RM0.05m for the current quarter. EBIT is still in the red due to some glitches in renal patient intake. We anticipate higher contribution from this home dialysis segment from 2017 onwards.

• Moving forward, we expect higher advertising and promotional expenses for Adventa’s Lucenxia Intellis awareness to the public.

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 FY16 earnings forecast by 42% as we expect lower contribution from its distribution segment and higher expenses, but increase FY17 earnings by 11% to take into account higher contribution from its home dialysis business.

Rating

HOLD, TP: RM0.63

• 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 RM0.63 based on CY16 P/E of 19x, which is at a 25% discount to Asian healthcare players.

Source: Hong Leong Investment Bank Research - 29 Jun 2016