Pharmaniaga’s FY18 core earnings of RM59.5m (+1.5% QoQ, +8.8% YoY) was below expectations. Revenue and EBITDA margins were flattish YoY despite the slower orders for the non-concession products offset by higher volumes to the APPL. PAT was lower due to higher taxes. We adjust our FY19-20 forecast downwards by 13%-17% to account for lower margins from slower orders from the non-concession segment. Consequently our TP decreases to RM3.55 (from RM4.08). We maintain our BUY call as valuations are at 1SD below 3 year mean and a dividend yield of 7.3% for FY19.

Below expectations. FY18 turnover of RM2,385.0m (2.6% YoY) translated into core PATAMI of RM59.5m (+8.8% YoY), accounting for 89% of ours and 92% of streets estimates. The results were below mainly due to (i) lower volumes from their manufacturing division sold to the MOH (ii) a higher L&D costs and (iv) a higher effective tax rate (37% vs. 25%).

Dividend. Declared final interim dividend of 2.0 sen per share bringing YTD dividend to 16 sen per share (FY17: 19.0 sen per share) yielding 5.8%.

QoQ: Revenue inched marginally to RM596.6m (1.5% QoQ) on the back of higher volumes sold to the concession (APPL). EBITDA margins declined by 1.1ppts (from 6.9% QoQ) on the lower sales from their manufacturing division. Consequently an effective tax rate for the group of 61.2% (recognition of prior years’ corporate tax) resulted in core PATAMI shrinking by 68.3% to RM6.0m.

YoY: 4Q18 revenue declined by -2.7% YoY (from RM613.2m) attributed to lower orders from government hospitals under the non-concession business. Consequently EBITDA declined by 11.4% to RM34.3m. Core PATAMI of RM6.0m (-60.9%) YoY is also attributable to a higher effective tax rate and a higher finance cost (+26.7%YoY).

YTD: FY18 revenue improved marginally to RM2385.0m (+2.6% YoY). EBITDA gained 3.9% to RM153.5m on better cost management resulting in margins remaining flattish at 6.4% despite the lower sales from their manufacturing division (PBT -18.7% YoY). PBT declined by -3.9% YoY to RM70.2m on higher interest expense (+25.4% YoY). Net gearing has increased from 0.8x in FY17 to 1.2x in FY18 due to higher receivables resulting from slower collections from customers, receivable days has increased to 49 days from 38 days consequently. Core PATAMI improved by +8.8% YoY after adjusting back for write offs, provisions and forex to a net amount of RM4.5m.

Forecast. We cut FY19-20 earnings by 13%-17% to account for lower margins on the back slower volumes from their manufacturing division sold to the MOH. Maintain BUY and a lower TP of RM3.55 (from RM4.08). Our TP is based on FY19 earnings pegged to a P/E multiple of 15x. Pharmaniaga remains competitive for the concession model due to their (i) expertise in L&D and (ii) the margins from the concession business is not attractive enough (c.1%-2%) to attract other distributors. In the near term, the group will focus on improving its collections from Indonesia. At these levels dividend yield of 7.3%-8.1% for FY19 is compelling.

Source: Hong Leong Investment Bank Research - 21 Feb 2019