PHARMA slid 52% post GE14 due to worries of a non-renewal of the 10Y concession agreement (ending end Nov 2019) as the group is viewed to be having monopolistic position. Nonetheless, we remain optimistic that PHARMA would still able to clinch the contract (albeit with modifications) premised on: (i) impeccable track record in L&D following huge amount of investment in its supply chain management to ensure efficient deliveries to public hospitals and clinics; (ii) the unattractive thin margins (~1.0-2.0%) from the concession business will discourage participation from other distributors due to high barriers of entry; (iii) highly unlikely that with PH’s financial position would undertake huge investments to emulate PHARMA’s model to ensure operational effectiveness and timely deliveries; (iv) increasing non-concession contributions from Indonesia’s market due to huge population over 270m people and (v) attractive risk-reward profile at 9.6x FY19E P/E and 1.2x P/B, which are 37% and 38% lower compared to its peers, supported by an attractive FY19-20 DYs of 7.4%.

A good proxy to the defensive pharmaceutical sector. 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 made up >90% of PHARMA’s revenue (~51%: concession; 49%: non-concession) segment. The remaining was contributions from Indonesia and other Malaysian private sector.

Steeply oversold; Mild signs of bottoming up. In the short term, PHARMA could still engage in a consolidation mode as share prices continue to hover below immediate 10D SMA at RM2.05. Nevertheless, downside risk is limited as MACD histograms are on the mend, with +DMI is gradually hooking up. Once this pattern ends, we expect prices to stage a breakout above RM2.05 to advance further towards RM2.13 (100H SMA) and RM2.26 (23.6% FR) before reaching our LT objective at RM2.56 (50% FR). Key supports are RM1.93 (daily lower Bollinger band) and RM1.86 (monthly lower Bollinger band). Cut loss at RM1.83.

Source: Hong Leong Investment Bank Research - 17 Apr 2019