We believe the 43% meltdown in share prices has grossly priced in the worries of the non-renewal of concession agreements (end in Nov 2019) with MoH. Overall, we remain positive on PHARMA due to their (i) expertise in L&D, (ii) the margins from the concession business are not attractive (c.1%-2%) to attract other distributors or competitors, (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, (iv) increasing contribution from Indonesia due to its huge population over 270m and (vi) attractive risk-reward profile at 10x FY19E P/E and 1.2x P/B, which are 36.7% and 41.1% lower compared to its peers (33% from 5Y average P/E of 15x), supported by a resilient FY18-20E EPS CAGR of 7% and attractive FY19-20 DYs of 8.6-9.4%.

A good proxy to defensive healthcare segment. Pharmaniaga (PHARMA) has an exclusive right through a concession agreement (CA) with the Ministry of Health (MOH) to local and foreign principals with clients that include government hospitals, private medical centres, pharmacies and private clinics. Overall, PHARMA’s core business segments include logistics and distribution (L&D), manufacturing of generic pharmaceuticals and medical devices, sales and marketing as well as distribution of medical products and hospital equipment. In 2018, government revenue makes up >90% of PHARMA’s revenue (54%: concession; 46%: non-concession) segment. The remaining balance is from Indonesia and other Malaysian private sector.

HLIB maintains a BUY with TP RM3.55. PHARMA slumped 43% since GE14 amid worries of the PH-government would review all medical supplies concession agreements (ending Nov 2019). Overall, we remain positive on PHARMA due to their (i) expertise in L&D, (ii) the margins from the concession business are not attractive (c.1%-2%) to attract other distributors or competitors, (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, (iv) increasing contribution from Indonesia due to its huge population over 270m and (vi) attractive risk-reward profile at 10x FY19E P/E and 1.2x P/B, which are 36.7% and 41.1% lower compared to its peers, supported by a resilient FY18-20E EPS CAGR of 7% and attractive FY19-20 DYs of 8.6-9.4%.

Values resurface amid steeply oversold position. In the short term, PHARMA may trap in consolidation mode as share prices continue to hover below the multiple major SMAs. Nevertheless, downside risks are limited as MACD histograms are on the mend, coupled with deeply oversold slow stochastic and RSI. Once this pattern ends, we expect prices to stage a breakout above RM2.52 (10D SMA), followed by the RM2.68 (38.2% FR) barrier, before reaching our LT objective at RM2.78 (23.6% FR). Key supports are RM2.28 (all-time low) and RM2.13 (123.6% FR). Cut loss at RM2.12.

Source: Hong Leong Investment Bank Research - 6 Mar 2019