Pharmaniaga’s FY19 core loss of -RM123.9m was below expectations. The deviation was due to recognition of amortisation for PhIS and provision for stock write-off as a result of Ranitidine product recall. Revenue increased (+18.3% YoY) thanks to concession, non-concession and Indonesia business; EBITDA margins fell due to lower contributions margins from manufacturing division and the provision of stock write off. We maintain our forecasts pending today’s briefing. We maintain HOLD call with unchanged TP of RM2.08.

Below expectations. Pharmaniaga reported 4Q19’s core net loss of -RM165.1m (vs. 3Q19 core PATMI RM12.1m; 4Q18 core PATMI RM6.0m), this brings FY19 core net loss to -RM123.9m (vs. FY18 core PATMI RM59.5m). We arrived at this figure after adjusting for EI’s totalling -RM23.1m (i) net reversal of receivables (+RM6.8m), (ii) net provision for stock and inventories (-RM19.4m), (iii) net foreign exchange losses (- RM0.5m) and (iv) one off expense of -RM10m. The deviation was due to the recognition of RM247m in amortisation charge for the Pharmacy Information System. We deem the results to be below expectations vs. ours and consensus estimates of RM34.6m and RM40.1m respectively.

Dividend. No dividend declared. FY19: 8.5 sen per share. (FY18: 16 sen per share).

QoQ. Revenue was flattish at RM715.7m (-0.2% QoQ). EBITDA margin fell by 3.4ppts (from 4.3% 3QFY19) on the back of higher operating costs (+23.5%) due to the provision of stock write off as a result of the Ranitidine product recall. Loss before tax of -RM238m was recorded due to revision in useful life of the rights to supply (PBT RM3.9m QoQ). Subsequently a core loss of -RM165.1m (3Q19: RM12.1m) was recorded.

YoY. Improved revenue (+20.0% YoY) was due to better demand from the concession, non-concession business and Indonesia. EBITDA margin declined by 4.8ppts to 0.9% due to increase in operating expenses (+50.0% YoY) due to provision of stock write off, partly cushioned by lower finance costs (-4.3% YoY). The revision of useful life of rights to supply, (a non-cash charge of RM247m) resulted in a loss before tax of -RM238m (4Q18: RM11.9m). Core loss of -RM165.1m (4Q18: Core PATMI RM6.0m) was recorded; however cushioned by positive tax of RM59.6m (vs.- RM7.3m SPLY) due to the (i) de-recognition of deferred tax liabilities and (ii) the recognition of deferred tax assets on the provision for the Ranitidine product.

FY19. FY19 revenue rose to RM2,820.5m (+18.3% YoY) on the back of stronger performances from concession, non-concession business and Indonesia. EBITDA of RM130.6m (-14.9% YoY) fell because of lower contributions from manufacturing (revenue: -12.0% YoY) due to lower take up by Government. Coupled with the PhIS amortisation charge, this resulted in a core loss of -RM123.9m (FY18: Core PATMI RM59.5m).

Outlook. Following the kitchen sinking in FY19, Pharmaniaga’s FY20 performance will not be burdened by the PhIS amortisation as it has been fully charged. Despite seeing the concession extended, Pharmaniaga will need to focus on cost management, operational efficiencies and increasing its utilisation rates from the manufacturing to turn the corner.

Forecast. We maintain our forecasts pending today’s briefing.

Maintain HOLD, TP: RM2.08. We maintain our HOLD call with unchanged TP of RM2.08. Our TP is based on PE target of 12x (-1SD below 5 year mean), tagged to FY20 EPS.

Source: Hong Leong Investment Bank Research - 21 Feb 2020