Pharmaniaga’s 3QFY20 core PATMI of RM4.4m (-68% QoQ, -63.7% YoY) brought 9MFY20 core PATMI to RM44.6m (+8.3% YoY). The results came in below ours and consensus’ estimates due to lower than expected revenue contribution (-12% YoY). We cut our FY20-22 profit forecasts by 8-10% to reflect weaker sales. We rollover our valuation to FY21 and post earnings adjustments, our TP falls to RM5.70 (from RM5.94). Our TP is based on FY21 earnings pegged to P/E multiple of 21.5x (+2SD of 5 year mean). We downgrade the stock to HOLD, as share price has rallied +201% since our Buy upgrade back in 24 Feb; we reckon it is now time to take some money off the table.

Below expectations. 3QFY20 core PATMI of RM4.4m (-68% QoQ, -63.7% YoY) brought 9MFY20’s sum to RM44.6m (+8.3% YoY). Core earnings were achieved after eliminating EIs; impairments, provision of stock obsolescence and forex gains, of - RM2.9m. The results accounts for 65% of ours and consensus estimates. The results shortfall was due to lower-than-expected revenue contribution (-12% YoY).

Dividend. Declared dividend of 1.5 sen per share going ex on 4 Dec 2020. (9MFY20: 10 sen per share vs. 9MFY19: 8.5 sen per share).

QoQ. Revenue of RM624.8m was slightly impacted (-3.2%) due to lower demand from both concession and Indonesia business caused by Covid-19 pandemic that disrupted access to doctors, clinics, pharmacies and hospitals. EBITDA margin fell by 1.3ppts (from 4.7% 2QFY20) despite lower costs (-2.1%). PBT declined (-71.4%) on lower other income (-25%) and interest income (-51.1%). Higher effective tax of 41% (vs. 2QFY20: 33%) also contributed to the decrease in Core PATMI of RM4.4m (-68%).

YoY. Lower revenue contribution (-12.8% YoY) was principally attributed to reduction in demand from both concession and Indonesia business which was affected by Covid19 pandemic. EBITDA margin reduced to 3.4% (from 4.3%) even though costs fell (- 13%). As such, Core PATMI saw a reduction of 63.7%.

YTD. 9MFY20 revenue remained stable at RM2.1bn (-0.7% YoY); contribution from non-concession business were higher this period driven by higher sales of PPE in response to Covid-19 pandemic. Overall PBT improved (+5.8% YoY). Logistics and distribution (L&D) division revenue was flat (-0.8% YoY), while finance cost was lower (-18.7% YoY). Manufacturing division saw a decline in revenue (-8.4% YoY) due to lower take up by Government, further impacted by higher finance costs (+5.7% YoY). Meanwhile Indonesian division reported a loss of RM2.4m that was mostly caused by higher finance costs (+3.5% YoY) which resulted from the ongoing delay in payment from government hospitals. Core PATMI improved to RM44.6m (+8.3%) despite a higher effective tax rate of 32% (vs. 9MFY19: 30%).

Outlook. We anticipate a stronger FY21-22 with potential projections coming from fill and finish process for Covid-19 vaccines as well as the partnership with SERUM on Pneumococcal Conjugate Vaccine (PCV). More information will be shared in the analysts’ briefing later today.

Forecast. We cut our FY20-22 profit forecasts by 8-10% to reflect weaker sales.

Downgrade to HOLD, TP: RM5.70. We roll forward our valuation to FY21, post earnings adjustments, our TP decrease to RM5.70 (from RM5.94). Our TP is based on FY21 earnings pegged to P/E multiple of 21.5x (+2SD of 5 year mean). We downgrade the stock to HOLD, as share price has rallied +201% since our Buy upgrade back in 24 Feb; we reckon it is now time to take some money off the table.

Source: Hong Leong Investment Bank Research - 26 Nov 2020