Pharmaniaga’s1Q20 core PATMI of RM26.5m (+>100% QoQ, +25% YoY) came in above ours and consensus expectations. The deviation was due to stronger orders from the MOH (Covid-19) and lower than expected depreciation (MFRS16 reclassification). Core PATMI improved (+25% YoY) mainly thanks to Logistic and Distribution division which achieved stronger contribution from Government hospitals and saw improved margins (from 2% to 4%, YoY), despite flattish revenue (-0.5% YoY). Raise FY20-21 earnings by 29%-23% to reflect higher revenue contribution from MOH orders and reduction in depreciation charges due to reclassification of MFRS16. Our TP raises to RM2.92 (from RM2.30), based on PE target of 13x (-0.5SD below 5 year mean) tagged to FY20 EPS. Maintain BUY.

Above expectations. Pharmaniaga reported 1Q20 revenue of RM819.9m (+14.6% QoQ, +4.3% YoY) that brought core PATMI of RM26.5m (+>100% QoQ; +25% YoY), accounting for 56% of ours and 66% of consensus estimates. This is above expectations even after taking into account a seasonally stronger 1Q (1Q18: 38%, 1Q19: 41%). The positive results surprise was due to stronger demand from the MOH (aided by Covid-19 outbreak), paired with lower than expected depreciation (due to reclassification of MRFS16) and amortisation charges (due to absence of PhIS amortisation).

Dividend. Declared first interim dividend of 6.0 sen per share (1Q19: 6.0 sen per share) going ex on 4th Jun, yielding 3.2%.

QoQ. Revenue rose to RM819.9m (+14.6%) mainly due to stronger demand from Government and private hospitals in Malaysia and Indonesia. Stronger PBT of RM30.9m was attained vs. the loss attained in 4Q19 (-RM238.5m). To recap, the loss in 4Q19 was one-off and was due to the revision in useful life of the rights to supply and provision of stock write-off as a result of the voluntary Ranitidine product recall. Subsequently a robust core PATMI of RM26.5m was recorded (4Q19: RM10.4m).

YoY. Improved revenue (+4.3%) was primarily due to better demand from the Indonesian Division (20.2%) while Logistic and Distribution Division remained flat (- 0.5%) and Manufacturing Division fell by -8%. PBT of RM30.9m (+2.1%) was achieved: (i) Logistic and Distribution Division reported the highest PBT of RM23m (+82.9%) thanks to stronger demand from Government hospitals, and some turnaround of some subsidiaries as well as improved margins of c. 4% (vs.1Q19: 2%); (ii) for the Manufacturing Division, lower PBT of RM9.1m (-52.4%) was from lower revenue of RM68m (-8%) in line with order trends from Government hospitals, followed by a fall in margins to c. 13% (vs. 1Q19: 26%); (iii) lastly the Indonesian Division still hovered around breakeven level (slight loss of -RM30k vs barely breakeven level of RM0.37m in 1Q19). All in, Pharmaniaga recorded a core PATMI of RM26.5m (+25%) with a lower effective tax rate of 27% compared to 35% in 1Q19.

Outlook. We feel Pharmaniaga will continue to gain from the Covid-19 outbreak, being the sole concessionaire to the MOH which is obviously increasing orders for drugs and consumables.

Forecast. We raise FY20-21 earnings forecast by 29% and 23% to reflect stronger revenue contribution from MOH orders and reduction in depreciation charges due to reclassification of MFRS16.

Maintain BUY, TP: RM2.92. With the increase of FY20-21 earnings forecast, our TP increases to RM2.92 (from RM2.30). Our TP is based on PE target of 13x (-0.5SD below 5 year mean), tagged to FY20 EPS. Maintain BUY.

Source: Hong Leong Investment Bank Research - 20 May 2020