Pharmaniaga’s 3QFY19 core PATMI of RM12.1m (+52.5% QoQ, -36.4% YoY) brought 9MFY19 core PATMI to RM41.2m (-23.0% YoY). The results came in below expectations. The deviation was due to higher than expected operating expenses (+27.9% YoY). YTD revenue improved (+17.7% YoY) backed by improved performance from both concession and non-concession business, however it was dragged by higher cost of sales and operating expenses. We adjust our FY19-21 downwards by -42%-29% to account for higher amortisation charges due to PHIS as well as higher operating costs. To reflect continuity of business (extension given by MOH), we increase our PE target from 9.3x to 12x, pegged to FY20 EPS. Maintain HOLD with slightly lower TP of RM2.08 (from RM2.14).

Below expectations. 3QFY19 core PATMI of RM12.1m (+52.5% QoQ, -36.4% YoY) brought 9MFY19 core PATMI to RM41.2m (-23.0% YoY), accounting for 69% of ours and 72% of consensus estimates. The deviation was due to higher than expected operating expenses (+27.9% YoY).

Dividend. No dividend declared. (3QFY18: 5.0 sen per share; 9MFY18: 14.0 sen per share; 1HFY19: 8.5 sen per share).

QoQ. Revenue improved to RM716.8m (+19.1% QoQ) mainly due to higher overall demand from both the concession and non-concession business in Malaysia and Indonesia. EBITDA margin fell by 2.0ppts (from 6.3% 2QFY19) on the back of higher costs. PBT declined (-68.9% QoQ) on higher operating costs (+19.7%) while core PATMI improved to RM12.1m (+52.5%). The latter is derived after removing non recurring expenses (c.RM10m) which occurred in this quarter.

YoY. Better revenue contribution (+22.0% YoY) was principally due to stronger demand from concession and non-concession business. EBITDA margin declined by 2.6ppts to 4.3% due to increase in costs (+25.2%). A higher tax rate of 86% (3QFY18: 13%) was attributed to the higher taxes due to under provision of previous year’s tax, hence core PATMI declined -36.4% to RM12.1m (3QFY18: RM19.0m)

YTD. 9MFY19 revenue rose to RM2,104.8m (+17.7% YoY) on the back of stronger performances from both concession and non-concession business. Overall PBT declined by (-20.0% YoY). Logistics and distribution (L&D) division generated higher revenue (+17.9% YoY), however this was slightly offset by higher finance costs (+14.0% YoY). Manufacturing division saw a decline in revenue (-10.7% YoY) due to lower take up by Government, further impacted by higher finance costs (+9.6% YoY). Meanwhile Indonesian division turned to losses despite increase in revenue (+16.4% YoY) due to higher finance costs (+19.6% YoY). Subsequently core PATMI declined -23.0% to RM41.2m, after the removal of non-recurring expenses (c. RM10.0m).

Outlook. We foresee 4QFY19 earnings to be further impacted due to the higher amortisation of Pharmacy Hospital Information System (PHIS). However, on a more positive note, the recent 5-year extension by the MOH provides medium term visibility.

Forecast. We tweak our forecast to account for higher amortisation charges on PHIS (PHIS was developed for MOH with expectation of 10 years however with the 5 year extension given by MOH, we shorten the amortization schedule from 10 years to 5 years) and higher operating expenses. Our FY19-21 earnings decrease by -42%, - 35% and -29% respectively

Maintain HOLD, TP: RM2.08. In light of MOH extending Pharmaniaga’s medical supply contract for 25 months and awarding a 5-year contract extension to provide L&D services, we raise our PE target from 9.3x (-2SD) to 12x (-1SD), tagged to FY20 EPS. Coupled with the earnings cut, which more than offsets the change in PE yardstick, our TP falls slightly from RM2.14 to RM2.08. Maintain HOLD.

Source: Hong Leong Investment Bank Research - 21 Nov 2019