Pharmaniaga’s 9M18 core earnings of RM53.4m (+36.1% YoY) was above expectations. YTD revenue improved 5.7% YoY on improved government orders. We adjust our FY18-20 forecast upwards by 9%-2% to account for more optimized operating costs moving forward. Consequently our TP increases to RM4.08 (from RM3.97). We maintain our BUY call as valuations remain at -1SD below 3-year mean and a dividend yield of 5.7% for FY18.

Above expectations. 9M18 turnover of RM1788.3m (5.7% YoY) translated into core PATAMI of RM53.4m (+36.1 % YoY), accounting for 87% of ours and 81% of streets estimates.

Dividend. Declared third interim dividend of 5.0 sen per share bringing YTD dividend to 14 sen per share (9M17: 13.0 sen per share). The interim dividend will go ex on 3rd December 2018.

QoQ: Revenue inched up marginally to RM 587.7m (0.8% QoQ) on the back of stronger contributions from Indonesia (revenue: +10.3%). EBITDA margin improved by 1.2ppts (from 5.6% QoQ) on the back of better costs management, whilst PBT improved by (47.1%) on lower operating expenses (-22.7% QoQ). Consequently an effective tax rate for the group of 12.9% (recognition of deferred tax) resulted in core PATAMI improving by 60.6% to RM19.0m.

YoY: 3Q18 revenue grew to RM582.7m (+2.3% YoY) attributed to improved orders from government hospitals. EBITDA margin improved by 0.9 ppts to 6.9% on better cost management and the flow on effects of a stronger RM YoY. Improvement in Core PATAMI of RM19.0m (+117.8%) YoY is also attributable to a higher tax base in 3Q17 (c.74.5%) due to the reversal of under provisioning in 2016.

YTD: 9M18 revenues improved to RM1,788.3m (+4.5% YoY) due improved orders from the concession. EBITDA gained 9.4% to RM78.8m on better cost management resulting in margins improving by 0.3 ppts to 6.7%. PBT improved by to RM58.3m (+9.6%) on lower operating expenses (-4.0% YoY). Core PATAMI improved 36.1% YoY after adjusting back for write offs, provisions and forex amounting to RM14.4m.

Forecast. We tweak our forecast to account for more optimized operating costs moving forward. Our FY18-20 EPS increases by 9%, 3%, 2%.

Maintain BUY and higher TP of RM4.08. Our TP is based on FY19 earnings pegged to a P/E multiple of 15x. We highlight that the stock is trading at -1SD below its 3 historical mean or 11.8x P/E. Furthermore, we believe that at these levels the risk to upside ratio is attractive (upside of 39.1%). Pharmaniaga remains competitive for the concession model due to their (i) expertise in L&D (ii) the margins from the concession business is not attractive (c.1%-2%) to attract other distributors who enjoy greater margins from distributing to the private sector and (iii) it is highly unlikely that with the current financial position of the government, they would undertake the necessary investments to return the drug distribution function back into public hands which will require immediate ramp up and <1% failure rate.

Source: Hong Leong Investment Bank Research - 21 Nov 2018