Pharmaniaga’s 1Q19 core earnings of RM21.2m (+256.1% QoQ) were within expectations. Revenue (+31.8% QoQ) improved on stronger volumes from both private and public hospitals in Malaysia and Indonesia. Whilst EBITDA (+61.8%) improved on better operational leverage and tailwinds from a stronger MYR during the period under review. Our FY19 forecast is revised downwards by 3% to account for model up keeping on the back of the release of the FY18 annual report. Consequently our TP decreases to RM3.45 (from RM3.55). We maintain our BUY call as valuations are at -1SD below the 5 year mean and a dividend yield of 6.4%-7.2% for FY19-20 is compelling.

Inline. 1Q19 revenue of RM786.1m (+27.2% YoY) translated into core PATAMI of RM21.2m (+251.6% QoQ, -6.4% YoY), accounting for 36% of ours and 38% of consensus estimates. We deem the results to be broadly in line as we expect a slower 2Q18 and 3Q18 based on historical procurement trends of the MOH. The results are in line with Pharmaniaga’s seasonally stronger 1Q (1Q17: 36%, 1Q18: 38%).

Dividend. Declared first interim dividend of 6.0 sen per share (1Q18: 5.0 sen per share) yielding 2.5%.

QoQ: Revenue grew +31.8% (from RM596.6m QoQ) on improved volumes sold to private and public hospitals in Malaysia and Indonesia. EBITDA margins improved by 1.4ppts (from 5.7% QoQ) on better operational leverage, cost controls and a stronger RM during the period. Core PATAMI improved by 3.5x to RM21.2m (from RM6.0m) on the back of a lower base in 4Q18 (higher effective tax rate c. 61.2% - recognition of prior years’ corporate tax). Net gearing improves marginally, decreasing from 1.2x in 4Q18 to 1.1x in 1Q19.

YoY: Revenue grew to RM786.1m (+27.2% YoY) on the back of higher volumes sold to the MOH concession and in Indonesia. EBITDA improved by +20.4% to RM55.5m in tandem with top line growth. Despite a lower effective tax rate of 35% (1Q18: 39%), higher marketing and promotional expenses resulted in core PATAMI declining -6.4% to RM21.2m (after adjusting back for impairments, provisions and forex to a net amount of RM1.5m).

Forecast. Our FY19 forecast adjusts downward by 3% on housekeeping post release of the annual report. We introduce our FY21 numbers. Maintain BUY and a lower TP of RM3.45 (from RM3.55). 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 6.4%-7.2% for FY19-20 is compelling.

Source: Hong Leong Investment Bank Research - 17 May 2019