A news article mentioned that the PN regime will not streamline the tender and procurement that was decided previously by PH. If true, this could possibly work out to Pharmaniaga’s favour via a new concession. We maintain our forecasts, pending further clarity on this news. Maintain BUY with unchanged TP of RM2.92 (13x FY20 PE).

NEWSBREAK

It was reported on Focus Malaysia that the Perikatan Nasional (PN) government will be putting aside a policy set by its predecessor, Pakatan Harapan (PH) to embark on a pooled procurement method that sought to centralise and combine tender and procurement worth RM500m across hospitals under the health, education and defence ministries.

Industries sources said the Health Ministry decided to go with the status quo of having 3 separate channels as opposed to pooled procurement. The government also has delayed the tender call to supply drugs across public hospitals to 4Q of this year with the awarding of contracts expected to take an extra year.

HLIB’s VIEW

Recap. Back in 2019, under PH, the government decided to centralise and combine the tender and procurement of RM500m worth of medicine across 3 ministries (Health, Defence and Education) to generate savings from bulk purchase. The PH government did not extend Pharmaniaga’s 25-year concession (ended Nov 2019). Instead, Pharmaniaga was appointed as the interim concessionaire, to procure and distribute drugs and medical supplies for MOH, for an additional 25-months (until Dec 2021) to avoid disruptions in services. Subsequently, MOH further decided to an additional 5-year period with Pharmaniaga (until Dec 2024) to continue providing logistics and distribution services (but without the procurement portion).

Possibly positive. Should the abovementioned news be true, we reckon that this could potentially work out to the benefit of Pharmaniaga. A reversion to the previous regime (i.e. pre-PH era) may potentially see Pharmaniaga getting a new concession to procure and distribute drugs and medical supplies to the MOH. Should this pan out, earnings certainty would see a new lease of life beyond end-2021 (which is when the interim concession awarded under the PH government expires). While there is risk that this possible “new concession” could be awarded to someone else, we believe that Pharmaniaga would be the top contender given (i) substantial cost already incurred (sunk) for the required infrastructure (PhIS), (ii) low margins (5 years average c.1-2% at the PBT level) serving as a natural deterrent for new entrants and (iii) track record of past experience.

Uncertainty of news. Should the news turn out to be untrue, we remain confident with Pharmaniaga’s earnings visibility that remains intact until FY21, as it will be operating under the current terms. Beyond that, we reiterate that Pharmaniaga should be in the forefront for any open tender given the 3 reasons mentioned above.

Forecast. Maintain.

Maintain BUY, TP: RM2.92. Maintain BUY with unchanged TP of RM2.92. Our TP is based on FY20 earnings pegged to P/E multiple of 13x (-0.5D below 5 year mean)

Source: Hong Leong Investment Bank Research - 2 Jul 2020