Pharmaniaga has received a conditional letter for the continuation of medical supply to MOH facilities for a period of 10 years. We understand that the extension would only commence after both parties iron out the terms for the new concession agreement and we expect the details to likely be finalised in 1H22. This news did not come as a surprise to us, given Pharmaniaga’s proven track record as a concessionaire company, as well as the logistic and IT infrastructure s it has in place to manage the concession business. This positive development would likely stimulate buying interest in Pharmaniaga, as the extension would provide continued earnings visibility for another 10 years. Reiterate BUY on Pharmaniaga, with an unchanged TP of RM1.04, implying a valuation of 18.5x PE (at +1SD of its 5-year mean) on its FY22f EPS of 5.6sen.

NEWSBREAK

Pharmaniaga has received a conditional letter from the MOH, for the continuation of medical supply logistics to MOH facilities. The extension is for a 10-year period, from year 2023. We understand that the extension would only commence after both parties finalise on the terms of the new concession agreement.

HLIB’s VIEW

Recall that Pharmaniaga has received an interim extension to its concession business in late-Dec 2021, of which the extension would commence 1st Jan 22, for a period of one-year. In the meantime, both MOH and Pharmaniaga would be ironing out the details and terms of the new concession agreement and the 10-year extension period would only commence after the finalisation of these terms. We expect the details to likely be finalised by 1H22, as we do not expect significant changes to be made to the terms of the agreement.

This news did not come as a surprise, given Pharmaniaga’s proven track record in managing the concession business, as well as the logistic and IT infrastructures it has established over the years to handle the concession business. While Pharmaniaga’s concession business is not one that enjoys lucrative margins – concession business’ PBT margins typically range between 1-4% in the recent 3 years – we are of the view that the potential 10-year extension would continue to provide earnings clarity over the longer term. The thin margins, coupled with the substantial capex required upfront to set up the required infrastructures would create a natural barrier of entry, ultimately deterring other new entrants from participating in the concession business.

Forecasts. We maintain our earnings forecast, as we await further clarity on the terms of the new concession agreement.

Maintain BUY. Reiterate BUY on Pharmaniaga, with an unchanged TP of RM1.04. Our TP implies a PE multiple of 18.5x (at +1SD of its 5-year mean), on its FY22f EPS of 5.6sen. We continue to like Pharmaniaga for (i) the use of Sinovac as booster shots in Malaysia, and (ii) potential export of Sinovac vaccines to more countries.

Source: Hong Leong Investment Bank Research - 12 Jan 2022