Results

• Below expectation: Adventa recorded PATAMI of RM0.4m for its 9M17 results. This was below our expectations, making up 21% of our FY17 forecasts.

Deviations

• Largely attributed to larger losses in the home dialysis segment amid slower than expected adoption.

Highlights

• 9M17 revenue grew 9% yoy from RM29.4m to RM32.1m on the back of better contributions from the distribution business. However, PATAMI registered a decrease of 30% yoy from RM0.529m to RM0.371m due to higher operating costs and wider losses from the dialysis segment.

• Sterilisation provider segment : YTD revenue grew by 12% yoy (qoq: +14%) whilst EBIT grew 21% yoy (qoq: -1%). We expect contributions from this segment to exhibit growth on the addition of new accounts and higher operational efficiency.

• Healthcare distribution segment : YTD revenue grew by 6% yoy whilst EBIT grew 56% yoy. The group continued to benefit from its shift from healthcare consumables to higher value products while making headways in the private sector sales. Nonetheless, on a qoq basis, revenue declined -20% whilst EBIT dipped -94% on what we believe to be reduced volumes for higher value margin products.

• Home dialysis segment : Losses widened in this quarter to RM3.7m yoy (9M16: RM-1.8m) as operating costs outweighed patient uptake. Moving forward, we continue to expect higher investments in the segment on the anticipation of a surge in patient uptake in FY18 assuming Adventa acquires the appropriate regulatory approvals.

• Sri Lanka… We understand there has been a further delay in the roll out of this project. However, its expansion abroad is expected to have material contributions to earnings.

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.

Forecasts

• We reduce our FY17 EPS by 69.6% to better reflect the higher operating cost from the home dialysis segment amidst delays in the push for adoption at the domestic and international level for its home dialysis system.

Rating

• Adventa has the first-mover advantage in the home renal dialysis treatment and near monopolistic position in the commercial sterilisation and warehousing activities within the region. However, earnings growth is tied to successful adoption of the home renal dialysis operations system domestically and abroad, post regulatory clearance. Maintain HOLD .

Valuation

• Maintain TP of RM0.65 based on 1.2x P/B, 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 - 20 Sept 2017