Results

• Below expectation: Adventa recorded PATAMI of RM0.3m for its 1HF17 results. This was below our expectations, making up 8% of our FY17 forecasts.

Deviations

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

Highlights

• 1H17 revenue declined 1% yoy from RM21.7m to RM21.6m. PATAMI registered a decrease of 66% yoy from RM0.98m to RM0.33m.
• Sterilisation provider segment: YTD revenue grew by 16% yoy (qoq: +6%) whilst EBIT grew 27% yoy (qoq: +18%). The segment continues to remain resilient. We expect contributions to exhibit growth throughout FY17 on the addition of new accounts to this segment.
• Healthcare provider segment: YTD revenue decreased by 8% yoy (qoq: +41%), EBIT grew 33% yoy (qoq: +49%). It appears that a turnaround in this segment is on the cards due to higher government spending after 6 subdued quarters and the group benefiting from their shift from healthcare consumable to higher value products.
• Home Dialysis segment: Teething issues still persist as regulatory hurdles pertaining to clinical studies and registration are taking longer than anticipated. Losses widened to RM2.4m yoy (1H16: RM-0.5m) as operating costs outweighs patient uptake. Moving forward, we continue to expect higher investments in the segment on the anticipation of an increase in patient uptake in 2H17.
• Sri Lanka… we understand there has been a slight delay in the roll out of this project from the projected start date in May. The pilot project has now been pushed further into 2H17. Their expansion abroad is expected to have material contributions to the segments revenues in FY17 and beyond.

Risks

• Success of the home renal dialysis business is dependent on a smooth transition of patients from hospitals and private treatment centres to home treatment post an elongated regulatory registration and clinical study period domestically.

Forecasts

• The longer than expected regulatory hurdle facing the company will in our opinion push adoption into FY18 at earliest, subsequently delaying earnings growth from their home dialysis business. Consequently, we reduce our FY17EPS by 57% but raise our FY18 EPS by 72%.

Rating

• 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 is highly reliant on successful adoption of the home renal dialysis operations system domestically and abroad, posts regulatory clearance.

Valuation

• Maintain HOLD with a marginally higher TP of RM0.65 based on 1.2x P/B (previously RM0.61), a 68% discount to Asian healthcare players due to its lower market cap, low liquidity and infancy of business. We are changing our valuation methodology given the longer than expected gestation period of its dialysis business.

Source: Hong Leong Investment Bank Research - 23 Jun 2017