Results

• Below expectation: Adventa recorded PATAMI of RM0.19m for its 1Q17 result. This was below our expectations, making up 7% of our FY17 forecasts.

Deviations

• Largely attributed to the lower contribution from the healthcare provider/ distribution segment and losses in the Home dialysis segment.

Dividends

• None.

Highlights

• 1Q17 revenue declined 24% yoy from RM12.3m to RM9.4m. PATAMI registered a decline of 80% yoy from RM0.9m to RM0.19m.

• Sterilisation provider segment : in 1Q17, revenue improved by 15% yoy (qoq: -13%) whilst EBIT grew 17% yoy (qoq: -27%). The quarterly decline in contributions stems from machine downtime due to a technical upgrade during the period. The segment continues to remain resilient. We expect contributions to exhibit growth throughout FY17.

• Healthcare provider segment : Revenue decreased by 36% yoy (qoq: -11%), EBIT declined 35 yoy (qoq:-49%). The decline is primarily attributed to the budget cut in the public healthcare sector. The group is in the midst addressing this shift in appetite from the public sector via shifting from healthcare consumable to higher value products and by making headway in the private sector. We expect earnings base diversification in this segment will take time to fruition.

• Home Dialysis segment : Still having teething issues domestically as regulatory hurdles and constraints are addressed. It recorded sales of RM0.12m for 1Q17. The segment recorded a loss of RM1.3m as operating costs outweighs patient uptake. Moving forward, we continue to expect higher investments in the segment on the anticipation of a surge in patient uptake in 2HF17.

• To note, the government of Sri Lanka has given Adventa the approval to distribute 5000 units of Luxcensia Intellis in the nation beginning May. Their expansion abroad is expected to have material contributions to the segments revenues in FY17. However we expect adoption rates of circa 200 units initially will be rolled out in the pilot project.

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

• Whilst expect earnings to accelerate in 2HF17 from their expansion abroad and as adoption in the domestic (private healthcare sector) market increases, we expect the distribution segment to go through a transitional period which will drag earnings. We adjust our FY17/18 downwards by 27% and13%.

Rating

• HOLD ↔ , TP: RM0.61 ( )

• We like Adventa for its first-mover advantage in the home renal dialysis treatment and near monopolistic position in the commercial sterilisation and warehousing activities within the region. Nonetheless, earnings growth rates are highly reliant on successful adoption of the home renal dialysis operations system domestically and abroad.

Valuation

• Maintain HOLD with a lower TP of RM0.61 based on CY18 P/E of 14x, which is at a steep discount to Asian healthcare players due to its lower market cap, low liquidity and infancy of business.

Source: Hong Leong Investment Bank Research - 29 Mar 2017