Pharmaniaga’s 2Q19 core earnings of RM5.7m (-73.1% QoQ, -51.9% YoY) brought 1H19 core earnings of RM26.9m (-22.0% YoY) which is within our expectations accounting for 45% of ours but above consensus estimates coming in at 49%. Declared second interim dividend of 2.5 sen per share going ex on 11th September. Maintain our earnings and BUY call as valuations are at - 1SD below 3 year mean and dividend yield of 5.7%-6.4% for FY19-20.

Inline. 2Q19 core PATAMI of RM5.7m (-73.1% QoQ, -51.9% YoY) brought 1H19 core PATAMI to RM26.9m (-22.0% YoY), accounting for 45% of ours and 49% of consensus estimates. We deem the results to be in line as 2Q-3Q are seasonally weaker based on historical procurement trends of the MOH.

Dividend. Declared second interim dividend of 2.5 sen per share going ex- on 11th September (YTD: 8.5 Sen Per Share; 2Q18: 4.0 Sen Per Share).

QoQ: Revenue declined 23.4% (from RM786.1m QoQ) on lower volumes sold to private and public hospitals in Malaysia and Indonesia, in line with the seasonality of 2Q-3Q. EBITDA and its margin subsequently declined by 31.6% (from RM55.5m) and 0.8ppts (from 7.1%). Core PATAMI declined to RM5.7m as a result (after adjusting back for reversals of impairments, provisions and forex to a net amount of -RM3.8m).

YoY. Revenue grew to RM601.9m (+3.3% YoY) on the back of higher volumes demanded from the Indonesia segment (Revenue: +17.5% YoY). PBT improved by +4.3% to RM12.5m (from RM12.0m) attributable to the L&D segment maintaining profitability in 2Q19 (PBT: RM6.3m vs –RM1.30 in 2Q18). Despite a lower effective tax rate of 8% (2Q18: 44%) attributable to lower taxes from the manufacturing companies, core PATAMI declined -51.9% to RM5.7m (from RM11.8m) after adjusting for the reversal of impairments amounting to RM7.8m vs. an impairment of RM1.6m in 2Q18.

YTD. Revenue grew +15.6% to RM1.39bn on stronger performance from both the concession and non-concession business. PBT improved by +5% to RM42.7m due to lower operating expenses (-7% YoY), offset by higher finance costs (+25% YoY). Subsequently core PATAMI declined -22% to RM26.9m on the above mentioned factors despite a lower effective tax rate of 21% vs. 41% YoY.

Forecast. Unchanged.

Maintain BUY and TP of RM3.45. Our TP is based on FY19 earnings pegged to a P/E multiple of 15x. Pharmaniaga remains the sole concession holder for logistics and distribution to the MOH. At these levels, dividend yield of 5.7%-6.4% for FY19-20 is compelling.

Source: Hong Leong Investment Bank Research - 26 Aug 2019