Results

• 1HFY16 turnover of RM1091.0m was translated into core net profit of RM35.2m, making up 36% and 41% of ours and consensus full year estimates, respectively.

• We deem the results below expectations despite 2Q is seasonally weaker compared to 1Q. Historically, 1H represents 45%-57% of full year earnings.

Deviations

• Drag from higher amortization from PhIS.

Dividends

• Declared second interim dividend of 5.0 sen per share (vs. 2Q15: 7.0 sen and 1Q16: 4.0 sen), YTD of 9 sen accounted for 42% of our DPS estimates. Ex-date on 6-Sept-16, payment on 20-Sept-2016.

• This represents a YTD payout of 73% and a yield of 1.6% respectively.

Highlights

• YTD: 1HFY16 revenue increased by 10.8% yoy to RM1091.0m due to higher demand from its Indonesia operations. However, PBT deteriorated by 24.6% yoy declining to RM48.0m from RM63.7m, attributed mainly to higher Amortization cost and Interest expense. Consequently, EBITDA margins deteriorated by 90bps yoy.

• Qoq: Revenue declined by 4.9% on the back of lower government orders; PBT declined 19% due to higher promotional expenses and the above mentioned factors.

• Logistics and distribution segment suffered a YTD loss before tax of RM3.1m caused by lower government order coupled with higher expenses and amortization from PhIS.

• Despite the higher turnover YTD, margin of manufacturing division deteriorated yoy due to higher promotional activities and lower off take from government hospitals.

• 2QFY16 sales ratio of concession: non concession: Indonesia is 55%:23%:22% vs. 2QFY15 55%:25%:20% representing an upshift in the Indonesian business.

• We expect continued drag from higher amortization costs from the PhIS implementation (bulk of the cost to be amortized by FY19). All in, we are still positive on the group’s long term outlook, especially its forays into Indonesia.

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

• FY16/17 EPS forecasts lowered by 22%/13% due to higher amortization and finance costs.

Rating

HOLD, TP: RM5.11

• We like Pharmaniaga for its defensive qualities, monopoly of the government concession business and its forays into Indonesia. Nonetheless, in the near term we expect the higher amortization and finance costs to drag earnings.

Valuation

We maintain our HOLD call on the stock with a lower TP of RM5.11 from RM5.78 based on unchanged FY17 P/E multiple of 15.8x, 15% discount to US peers (see Figure #6).

Source: Hong Leong Investment Bank Research - 22 Aug 2016