The Health Minister announced that Pharmaniaga will act as the interim concessionaire to distribute drugs and medical supplies for an additional 25 months. The news come with no surprise as we have expected it. We do believe Pharmaniaga would still be the ideal choice for the job given its experience and incumbent position. We maintain our HOLD call with unchanged TP of RM2.14 based on FY19 earnings pegged to P/E multiple of 9.3x (-2SD below 5 year mean).

NEWSBREAK

Pharmaniaga Bhd will act as the interim concessionaire, to distribute drugs and medical supplies for the Health Ministry, for an additional 25-months, when their contract expires 30th November 2019. Health Minister Datuk Seri Dzulkefly Ahmad told a press conference that the Cabinet had decided that an open tender process would take place to appoint the next concessionaire company once the interim period is over. The 25-month period was decided to avoid disruptions in services of procurement and distribution of drugs and medical supplies. The government had also decided to an additional 5-year period with Pharmaniaga as the interim concessionaire company, if the ministry is still unable to handle the shift of duties after December 2021. (Malay Mail)

HLIB’s VIEW

No surprise. The news is not surprising as we have stressed this previously. As mentioned, we are of the view that the migration to an open tender method will not occur immediately while a great deal of matters needs to be ironed out, hence we view Pharmaniaga’s earnings will be unaffected in the near term. With the 25-month extension, we stressed that earnings visibility remains intact for FY19-21, as Pharmaniaga will be operating under the same current terms.

Competitive advantage. As stated before, we do strongly believe Pharmaniaga remains in pole position to competitively bid in the open tender for the concession backed by 25 years of historically proven track record. In addition, Pharmaniaga already has its existing systems and infrastructure in place, while potential new entrance would need to upfront a substantial amount of capex to build up the capacity, especially to cater to East Malaysia. As we understand the thin margins from concession business is not attractive enough (4 years average c.1-2% at the PBT level) to invite newcomers to embark into the journey.

Earnings impact. On average, in the past 4 years, logistics and distribution segment contributed 60%-62% to revenue and 8%-10% to PBT (margins 1%-2%). Assuming we strip out concession entirely in FY20, ceteris paribus, the earnings impact would be a decline north of 11% at the PBT level.

Forecast. Numbers are maintained this juncture as we believe that the earnings projection under our forecast horizon is still insulated (FY19-21 as elaborated above).

Maintain HOLD, TP: RM2.14. We are pending further clarity from the Government on the framework and structure of the new drug distribution model, thus we maintain HOLD with unchanged TP of RM2.14. Our TP is based on FY earnings pegged to P/E multiple of 9.3x (-2SD below 5 year mean).

Source: Hong Leong Investment Bank Research - 18 Nov 2019