Results

• Below expectation: Adventa recorded PATAMI of RM0.5m for its 9MFY16 results. This was below our expectations, making up 14% of our FY16 forecasts.

Deviations

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

Dividends

• None.

Highlights

• 9MFY16 revenue declined 7.8% yoy from RM31.8m to RM29.4m. PATAMI registered a decrease of 77% yoy from RM2.3m to RM0.5m.

• Sterilisation provider segment: Sales improved 10% yoy (qoq: 12%) whilst EBIT increased 14% yoy (qoq: 38%). The segment continues to highlight its resilience and viability despite the challenging operating environment. We anticipate brighter prospects from this segment as new accounts are opened.

• Healthcare provider segment: The budget cut in the public healthcare sector continues to impact Adventa’s distribution segment. Sales decreased by 29% yoy (qoq: -31%), subsequently EBIT entered the red in the 3Q qoq but remains positive yoy. In an effort to mitigate reliance on public sector clients, the group has made a push towards the private sector which is expected diversify its earnings base by 2017.

• Home Dialysis segment: Still in its infancy, it recorded sales of RM0.07m for the current quarter. EBIT is still in the red as promotional and marketing costs outweighs patient uptake. We still anticipate higher contributions in 2017.

• Moving forward, we continue to expect higher advertising and promotional expenses for Adventa’s Lucenxia Intellis . The outlook for the distribution segment remains dull pending 2017 budget announcement.

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 FY16/17 earnings forecasts by 50%/13% as we expect lower contribution from its distribution segment and higher expenses. We also roll over our valuation to CY17.

Rating

HOLD, TP: RM0.77

• 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 higher TP of RM0.77 based on CY17 P/E of 10x, which is at a 75% discount to Asian healthcare players due to its lower market cap, low liquidity and infancy of business.

Source: Hong Leong Investment Bank Research - 30 Sep 2016