Results

• 9M16 turnover of RM1606.2m translated into core net profits of RM49.5m, which accounted for 65% of ours and streets estimates. We deem this to be broadly in line (historically, 9M accounts for 61%-77% of full year earnings)

• One-off adjustments:

RMk Write-offs Impairment FOREX Tax Total

1Q16 1.547 0 0.015 0 1.562

2Q16 0.619 0 (0.330) 0 0.289

3Q16 2.218 0 (0.171) 0 2.047

Deviations

• There was a positive amortization in 3Q16 to the amount of RM1.9m due to the extension of the useful life of the expenses incurred under the concession agreement from 4 years to 14 years, subsequently RM21.5m of previous over amortization was written back during the quarter.

Dividends

• Declared third interim dividend of 4.0 sen per share (3Q15:9 sen), bringing YTD declared dividends to 13.0 sen (9M15:23 sen). This represents payout of 72% and a yield of 2.3% respectively.

Highlights

• YTD : 9MFY16 Revenues increased by 6.4% yoy from due to higher demand from the groups Indonesian operations. Nonetheless, PBT deteriorated by 23.7% attributed primarily to higher finance expenses and selling and distribution costs.

• Qoq: Revenues declined by 3.1% on the back of lower government orders and reduced contributions from Indonesia. Subsequently, PBT declined 7.3%.

• Logistics and distribution segment suffered a YTD loss before tax of RM1.0m caused by lower government order coupled with higher finance expenses and operating costs.

• Manufacturing division’s YTD PBT declined by 13% on the back lower off take from government hospitals.

• Management guided that they are confident of securing the concession renewal in 2019 for another 10 years, hence the decision by the management to smoothen earnings by lengthening amortization schedule despite short-term operational hiccups.

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

• We adjusted earnings as we lengthen our amortization schedule, impute higher operational costs and revised our interest expense projections. Our FY16/17/18 EPS is adjusted by -15%/3%/2%.

Rating

HOLD ↔

• 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 lower government orders and finance costs to drag earnings.

Valuation

• We maintain our HOLD call on the stock with a higher TP of RM5.26 from RM5.11 based on unchanged FY17 P/E multiple of 15.8x, a slight discount to International peer.

Source: Hong Leong Investment Bank Research - 22 Nov 2016