Results

• Above-FY17 turnover of RM2.3bn (+6.2% yoy) translated into core PATAMI of RM54.7m (3.5 % yoy), accounting for 107% of ours and 99% of streets estimates.

Dividends

• Declared fourth interim dividend of 6.0 sen per share bringing YTD dividends to 19 sen per share (FY16: 16 sen).

Highlights

• YTD: Revenue grew by 6.2% yoy on the back of increased orders from government hospitals and double-digit growth from the Indonesian operations (+15.7% yoy). Core PATAMI improved by 8.3% yoy due to Indonesia turning profitable, registering PBT of RM4m vs -4.7m in FY16 and the group registering a lower effective tax rate of 23.8% vs 36% yoy.
• EBITDA margins declined 0.5ppts yoy to 6.4% from 6.9% as the group had to supplement the deficit in manufacturing products via trading, which increased its cost of sales. Recall that in 2Q17 certain production lines were shut down in preparation for the facilitation of new products that were approved ahead of schedule.
• Yoy: 4Q17 revenue grew 5.2% yoy to RM613m attributed to increased orders from government hospitals and improved contributions from Indonesia. Core PATAMI increased to RM16.2m (+390%) due to (i) a low base in 4Q16 (ii) lower finance costs (-21%) (iii) Indonesia turning profitable and positive tax during the quarter.
• Qoq: Revenue grew 6.7% qoq whilst PATAMI grew by 73% due to the same factors as mentioned above.
• Manufacturing revenue declined 18.6% yoy to RM74.9m from RM91.0m on the back of the interruption of manufacturing lines in 2Q17. On a yoy perspective, despite revenue from this segment declining, PBT margins improved by 2.8ppts to 27% yoy on the back of an improved product mix.
• Indonesian division recorded a PBT of RM4m YTD (FY16: - RM4.8m). This turnaround was due to the product rationalization exercise and lower finance cost post restructuring of Indonesia’s financing facilities . We continue to expect stronger contributions from the Indonesian segment moving forward.

Catalysts

• Catalysts for the stock arise from faster than anticipated penetration into the non-concession and private sector domestically, reaching critical mass in its product offering, and marketing in the Indonesian market.

Risks

• Apart from non-compliance to productions standards, contamination and patent disputes, near term risks to the stock arises mainly from lower offtake from the government and hiccups in their forays into the Indonesian market.

Forecasts

• Unchanged. We introduce our FY20 forecast. Rating #bull# We remain neutral on Pharmaniaga’s prospects in FY18 as we expect the government’s procurement rationalization will continue to persist. Nonetheless, the Indonesian segment has turned a leaf. Maintain HOLD.

Valuation

• We raise our TP to RM3.97 from RM3.77 as we roll our valuation into FY19. Our TP is based on FY19 earnings pegged to a P/E multiple of 15x, in line with the peers average.

Source: Hong Leong Investment Bank Research - 28 Feb 2018