Results

• Below expectation: Adventa recorded PATAMI of RM0.14m in FY17. This was below our expectations, making up 26% of our FY17 forecasts.

Deviations

• Largely attributed to losses in the home dialysis segment on the back of slower than expected adoption and lower contributions from the distribution business.

Highlights

• FY17 revenue grew 11% yoy from RM39.9m to RM44.2m on the back of better contributions from the distribution and sterilization businesses. PATAMI registered a decrease of 80% yoy from RM0.7m to RM0.1m due to higher operating costs and wider losses from the dialysis segment.
• Sterilisation provider segment: YTD revenue grew by 8% yoy (qoq: 7%) whilst EBIT grew 8% yoy (qoq: -18%). The segment continues to remain resilient. We expect contributions to exhibit growth on the addition of additional 20% new extra capacity.
• Healthcare distribution segment: YTD revenue grew by 6% yoy whilst EBIT declined 22% yoy on the back of lower orders from hospitals. On a qoq basis revenue improved by 17% whilst EBIT grew by 150% on better sales of higher margin products coupled with the low base effect.
• Home dialysis segment: Losses widened to RM4.8m yoy (FY16: -RM3.3m) as operating costs outweighs patient uptake. Moving forward, we continue to expect higher investments in the segment in FY18 with a ramp up in marketing expenses upon the completion of trials and regulatory hurdles.
• Sri Lanka. We understand that trials for 200 machines will be rolled out for 6 months starting in Jan 2018, the profitably hinges upon Adventa achieving approvals and hitting critical mass post a successful trial period.

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 FY18-19 EPS by 95-88%% on more aligned expectations with the projected take up rate of patients for the dialysis segment.

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 tied to successful adoption of the home renal dialysis operations system domestically and abroad, post regulatory clearance. Maintain HOLD.

Valuation

• Post earnings evaluation our TP decreases to RM0.64 (from 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 - 02 Jan 2018