Pharmaniaga’s 2QFY20 core PATMI of RM13.7m (-48.2% QoQ, +73.1% YoY) brought 1HFY20 core PATMI to RM40.2m (+38.1% YoY). The results came in above ours and consensus’ expectations; the deviation was due to higher than expected revenue (+7.3% YoY). YTD top-line increased (+5.6% YoY) mainly on improved performance from non-concession business (higher PPE sales given Covid-19 pandemic). We raise our FY20-21 forecasts by +13% to reflect in better sales contribution, and we introduce FY22 numbers. Currently, market sentiment remains strong on (i) future concession contract along with (ii) the fill and finish process for Covid-19 vaccine. Hence, we took the opportunity to upgrade our P/E multiple to 18x (from 13x) which is 1SD above 5 year mean, and roll forward to mid FY21 EPS. Accordingly, our TP (P/E target of 18x pegged to mid FY21 EPS) increases to RM4.95 (from RM2.92). Maintain BUY.

Above expectations. 2QFY20 core PATMI of RM13.7m was arrive after adjusting for net EI RM3.7m on impairment of receivables and provision for stock obsolescence (- 48.2% QoQ, +73.1% YoY), it brought 1HFY20 core PATMI to RM40.2m (+38.1% YoY). The results came in above our and consensus estimates at 65% and 62% respectively. The deviation was due to higher-than-expected revenue (+7.3% YoY).

Dividend. Declared second interim dividend of 2.5 sen per share going ex on 7 Sep (2Q19: 2.5 sen per share, YTD: 8.5 sen per share).

QoQ. Revenue declined to RM645.8m (-21.2%) mainly due to lower demand from both concession business and the Indonesia business. Indonesian business was heavily affected by Covid-19 which saw limited access to doctors, clinics, pharmacies and hospitals. Concession business saw a drop in demand as we believe hospitals have sufficient stocks to keep them operational (stocked up back in 1Q). EBITDA margin fell by 1.3ppts (from 6.0% 1QFY20). PBT declined (-53.6%) while core PATMI fell to RM13.7m (-48.2%) on higher effective tax rate of 33% (1QFY20: 27%).

YoY. Improved revenue contribution (+7.3%) was mainly due to stronger demand from non-concession business, resulting from higher sales of personal protective equipment (PPE) due to Covid-19. EBITDA margin declined by 1.6ppts to 4.7% due to increase in costs (+7.7%). Also, finance costs reduced by 12.6%. Thus, PBT increased (+14.8%) while core PATMI spiked 73.1% to RM13.7m (2QFY19: RM7.9m). Core PATMI is derived after adding back RM3.7m on impairment of receivables and provision for stock obsolescence.

YTD. 1HFY20 revenue rose to RM1,465.7m (+5.6%) on the back of stronger showing from non-concession business (higher PPE sales given Covid-19 pandemic). Overall PBT grew by 5.8%; (i) Logistics and distribution (L&D) division generated higher revenue (+6.3%) and lower finance costs (-26.4%), (ii) Manufacturing division saw a decline in revenue (-3.7%) in line with lower take up by Government but was slightly mitigated by lower finance costs (-7.9%), (iii) Indonesian division recorded a deficit of RM2m and this was mainly due to higher finance costs (+18%), which resulted from the delay in payments from Government hospitals, despite the increased revenue (+4.8%). Subsequently core PATMI improved (+38.1%) to RM40.2m. Core PATMI is derived after adding back RM7.8m on impairment of receivables and provision for stock obsolescence.

Outlook. We anticipated a stronger 2H, as we understand, demand enquires have been picking up since end of Jun; thus, indicating a stronger demand in 2H. More information will be shared in the analysts’ briefing later on Monday.

Forecast. We increase our FY20-21 forecasts by +13% to reflect in better revenue contribution, we included in annual report figures and introduce FY22 numbers.

Maintain BUY, TP: RM4.95. Positive sentiment remains strong on (i) the future concession contract along with (ii) the fill and finish process for Covid-19 vaccine. Thus, we took the opportunity to upgrade our P/E multiple to 18x (from 13x) which is 1SD above 5 year mean and roll forward to mid FY21 EPS (from FY20 EPS). We feel 18x P/E is fair as we compare the current average P/E of competitors is at 21x. Our TP increases to RM4.95 (from RM2.92). Maintain BUY

Source: Hong Leong Investment Bank Research - 21 Aug 2020