Results

• Below expectation: Adventa recorded PATAMI of RM0.7m for its FY16 results. This was below our expectations, making up 36% of our FY16 forecasts.

Deviations

• Higher marketing and promotional expenses from its Home Dialysis business disproportional to patient uptake.

Dividends

• None.

Highlights

• FY16 revenue declined 4.7% yoy from RM41.8m to RM39.9m. PATAMI registered a decrease of 78% yoy from RM3.1m to RM0.7m.

• Sterilisation provider segment : In FY16 sales improved 16% yoy (qoq: +14%) whilst EBIT increased 41% yoy (qoq: +15%). The segment continues to highlight its resilience and viability despite the challenging operating environment. Moving into FY17 we can expect contributions from this segment to continue to grow as new accounts are opened.

• Healthcare provider segment : In FY16 sales decreased by 11% yoy (qoq: +54%), EBIT grew 90% yoy. Despite the cut in public healthcare budget, the group managed to largely mitigate the leaner public expenditure environment via shifting from healthcare consumable to high value technical products. The group has also made headway into the private sector which is expected diversify its earnings base in FY17.

• Home Dialysis segment : Still in its infancy, it recorded sales of RM0.12m for FY16. The segment recorded a loss of RM3.3m as promotional and marketing costs outweighed patient uptake. In FY17, the group will embark on a more targeted promotional campaign; however patient uptake is expected to remain slow but steady.

• Moving forward, we continue to expect higher advertising and promotional expenses for Adventa’s Lucenxia Intellis. The outlook for the distribution segment to the public sector remains coy, partially offset by a better product mix and inroads towards the private sector.

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

• FY17 earnings forecasts are adjusted downwards by 50% as we expect higher operating expenses and margin pressures due to the weaker ringgit. We also roll over our valuation to CY18.

Rating

• HOLD ↔ , TP: RM0.66

• We like Adventa due to its first-mover advantage in home renal dialysis treatment and almost monopolistic position in commercial sterilisation and warehousing activities within the region; high barrier to entry for potential rivals due to high cost of machinery and technological know-how;

• Nonetheless, in the short run earnings growth rates are highly reliant on successful implementation and execution of the new home renal dialysis operations

Valuation

• Maintain HOLD with slightly lower TP of RM0.66 based on CY18 P/E of 14x, which is at a significant discount to Asian healthcare players due to its lower market cap, low liquidity and infancy of business.

Source: Hong Leong Investment Bank Research - 28 Dec 2016