Pharmaniaga’s 1H21 core PATAMI was above expectations, due to better than expected earnings from their Sinovac distribution venture. We raise our FY21/22 forecasts by 5.1%/3.0% to account for better than expected earnings contribution from Sinovac venture, but keep FY23 forecasts unchanged. After rolling over our valuation year to FY22 and factoring higher earnings, our TP rises from RM1.10 to RM1.13 on 21.5x FY22 PE. Upgrade to BUY from Hold.

Above expectations. 2Q21’s core PATMI of RM18.6m (-29.9% QoQ, +35.4% YoY) brought 1H21’s sum to RM45.0m (+12.1%), which made up 70.3%/73.6% of ours and consensus expectations. The positive results surprise was due to better than expected profitability from Pharmaniaga’s fill-and-finish Sinovac venture. Core PATMI was arrived after adding back EI items impairments, provision of stock obsolescence and forex amounting to 7.8m.

Dividend. 2Q21 declared DPS of 1.5 sen per share goes ex on 7 Sep 2021 (1H21 DPS: 2.3 sen). 2Q21: 0.5 sen (1H20: 1.7 sen)

QoQ. Revenue rose 48.3% mainly due to the sales of Sinovac Covid-19 vaccines to the MoH. Despite this, lesser contribution from the logistics and distribution division (PBT: -61.6%) from higher selling and distribution expenses from Sinovac Covid-19 vaccine delivery as well as higher A&P spend for over-the-counter consumer products led core PATAMI to fall -29.9%.

YoY. Core PATAMI rose 35.4% in tandem with higher revenue (+82.3%) mainly due to the better contribution from the manufacturing division (PBT: +282.4%) (from the fill and finish operations of Sinovac vaccines).

YTD. Poorer profitability in the logistics and distribution division (PBT: -12.1%) was due to lesser demand for PPE in 1H21. However, this was more than offset by better earnings in the manufacturing division (PBT: +90.3%) from the fill and finish of Sinovac vaccines. All in all, core PATAMI rose by 12.1% in tandem with higher sales (+34.5%).

Outlook. We believe Pharmaniaga’s 3Q21 earnings will continue to be strong given (i) 12.4m Sinovac vaccines doses were fully delivered by 21 Jul, (ii) Pharmaniaga supplied an additional 2m doses at end-July and (iii) Pharmaniaga had received an additional 6.0m orders in August. Going forward, we believe two events could cause positive share price sentiment for Pharmaniaga. Firstly, the possibility of Sinovac’s vaccine being approved for adolescents between 12-17 years old in Malaysia which would result in an additional demand of 6m doses. We note that Malaysia has already approved Pfizer for adolescents use. Furthermore, Sinovac has already received approval for this in Indonesia and China. Secondly, booster shots being approved in Malaysia. Note that the government have already allocated RM3.5bn to procure booster shots and cover adolescents below 18 years old (source).

Forecast. We raise our FY21/22 forecasts by 5.1%/3.0% to account for better than expected earnings contribution from Sinovac vaccine venture, but keep FY23 forecasts unchanged.

Upgrade to BUY, TP: RM1.13. After rolling over our valuation year to FY22 (from FY21), and factoring higher earnings, our TP rises from RM1.10 to RM1.13 based on an unchanged PE multiple of 21.5x (+2SD five year mean). We reckon the possibility that Sinovac vaccines being approved as booster shots and for adolescent use is likely to occur in 2H21, which would serve as a share price catalyst. Upgrade to BUY (from Hold).

Source: Hong Leong Investment Bank Research - 23 Aug 2021