Pharmaniaga shared that it has supplied c.2m doses of Covid-19 vaccine in 1Q22 and will focus on drawing down the existing vaccine stockpile going forward (currently at c.10m doses). The Group also has yet to see any significant disruption of API supplies thus far as it usually has 3-6 months of ready supplies available. While the weakening of ringgit might potentially lead to higher API costs in subsequent orders, we find comfort that Pharmaniaga has hedging positions that will help to cushion the impact. We make no changes to our earnings forecasts and we retain our BUY recommendation on Pharmaniaga, with an unchanged TP of RM0.83. Our TP implies a PE valuation of 11.6x (at +0.5SD of its 5-year mean) on its FY22f EPS of 7.1sen.

We Attended Pharmaniaga’s Briefing Yesterday With the Following Key Takeaways:

Covid-19 vaccines. Pharmaniaga shared that it has supplied c.2m doses of Covid-19 vaccine in 1Q22 and will focus on drawing down the existing vaccine inventories going forward. We note that Pharmaniaga still has another 10m doses of Covid-19 vaccine in its inventories now, which includes both fill & finish doses, as well as finished doses procured from Sinovac directly. Ministry of Health (MoH) has also requested for Pharmaniaga to keep a stockpile of Covid-19 vaccines, so that Pharmaniaga will stand ready to supply vaccines to the government should a new variant or a new wave of infection occurs. Pharmaniaga also targets to deplete the existing stockpile by this year, as the vaccines are expected to expire by the end of CY23.

Not seeing any disruption in APIs just yet. Despite active pharmaceuticals ingredients (APIs) are mostly imported and was affected by the Shanghai lockdown and ongoing Russian-Ukraine war, we understand that Pharmaniaga has yet to see any disruption in terms of supply and costs so far, as it usually keeps 3 to 6 months’ worth of supplies in hand. Pharmaniaga’s APIs are also sourced from two different parties, giving it the freedom to opt for the more cost effective option. Weakening of ringgit is also not expected to have a huge impact as the Group has hedging positions to help cushion the impact. That said, should there be any cost increases, we highlight that it would be difficult for Pharmaniaga to pass it on to the government, and would solely depend on its ability to be more efficient to mitigate the impact.

Beyond Malaysia. Recall that Pharmaniaga’s Indonesia operations have turned around in 1Q22 with a PAT of c.RM4m (vs sustained losses or minimal profits in the recent years), owing to its inventory optimisation efforts and aggressive payment collection. The Group expects the growth trajectory to continue, as it has seen sales and marketing activities ramping up gradually for this segment. Alternatively for countries that it does not have any presence in currently, Pharmaniaga will seek to enter the market by partnering local players with either strong connection to the local authorities or with a market leading position. Case in point, Pharmaniaga has recently inked a MoU with Prime Medical Store of Dubai, to help facilitate with the Group’s entry into the Middle East and North Africa (MENA) market.

Potential M&As. The Group is currently looking to seek growth inorganically, either by way of (i) merging with another pharmaceutical logistics company, or (ii) acquiring another fast-moving consumer goods (FMCG) operator. We highlight that discussions are underway presently and Pharmaniaga targets to make an announcement by end FY22 once there are more conclusive information to be shared.

Forecast. Unchanged.

Maintain BUY, TP: RM0.83. We maintain our TP of RM0.83, based on a PE multiple of 11.6x (+0.5SD of its 5-year mean) on its FY22f EPS of 7.1sen. Reiterate BUY.

Source: Hong Leong Investment Bank Research - 10 Jun 2022