Pharmaniaga reported a 4QFY22 core LATAMI of -RM24.2m (3QFY22: RM11.7m, 4QFY21: RM110.1m), bringing FY22 core PATAMI to RM28.2m (-86.8% YoY), missing both our and consensus estimates. Key variance was due to higher than-expected operating expenses and finance costs. We lower FY23f and FY24f forecasts by 51% as we raise our operating expense and finance cost assumption. Subsequent to our earnings cut, TP is lowered to RM0.31 (from RM0.63 previously), representing a P/E multiple of 11.6x on its FY23f EPS of 2.7 sen. Separately, Pharmaniaga has also slipped into PN17 as its shareholders’ equity position turned negative after making a provision of RM552.3m for its slow-moving Covid-19 vaccine stock. Given the downside and the uncertain outlook after slipping into PN17, we are downgrading our rating on Pharmaniaga to SELL (from Buy previously).

Loss making quarter. Pharmaniaga reported a 4QFY22 core LATAMI of -RM24.2m (3QFY22: RM11.7m, 4QFY21: RM110.1m), which brought FY22 core PATAMI to RM28.2m (-86.8% YoY). The results came in below both our and consensus estimates, at 41% and 46% respectively. Key variance was due to higher-than expected operating expenses and finance costs. 4QFY22 core LATAMI was arrived at after adding back EIs amounting to RM619.8m (mainly comprises of net provision for stock obsolescence and inventories write-off of RM561.3m and impairment of goodwill of the Indonesia manufacturing cash-generating unit of RM50.3m).

Dividend. None declared. (FY22: 1.9 sen). 4Q21: 5 sen (9M21: 9.3 sen)

QoQ. Revenue slipped 6.7% due to lower contribution from its non-concession business, whereby in 3Q22 Pharmaniaga recorded a one-off sales of leukaemia drugs. Exacerbated by the higher operating expenses and growing finance costs, Pharmaniaga reported a core LATAMI of -RM24.2m (vs 3QFY22: RM11.7m). During the quarter, Pharmaniaga also was affected by (i) product development cost write-off, and (ii) additional rental costs for Logistics and Distribution (L&D) warehouse.

YoY. Revenue climbed 21% on the back of stronger contribution from its L&D segment (+32%) and Indonesia segment (+16%). This neutralised the weaker contribution from its Manufacturing segment (-75%) due to lesser Covid-19 vaccine sales. Overall revenue was lifted by demand picking up post-pandemic. Despite stronger topline, Pharmaniaga reported a core LATAMI of -RM24.2m (vs 4QFY21: RM110.7m), due to (i) higher operating costs, (ii) higher cost of sales, (iii) higher financing costs, and also (iv) lower revenue from Manufacturing segment that yields better margins.

YTD. Revenue fell 27% predominantly due to lower Covid-19 vaccine sales, despite encouraging growth in both its concession (more products added to the concession list in 2H22) and private sector business (aggressive sales and new product launches). Predominantly due to lower Covid-19 vaccine sales, Pharmaniaga’s core PATAMI tumbled 87%.

Bogged down by impairment provision, triggering PN17. In accordance to the requirement of MFRS102, Pharmaniaga has made a provision of RM552.3m for its slow-moving Covid-19 vaccine stock, resulting in a negative shareholders’ equity position of -RM248.7m and subsequently triggering the criteria for Practice Note 17 (PN17). We note that there could potentially be a reversal in the impairment provision should Pharmaniaga be able to sell more of its existing Covid-19 stockpile. Currently the Group is engaging with various parties including the Islamic Development Bank (IDB) and Ministry of Health (MoH) to sell its stockpile.

Forecast. Cut FY23f and FY24f forecasts by 51% as we raise our operating expense and finance cost assumption.

Downgrade to SELL, TP: RM0.31. Post earnings revision, TP is lowered to RM0.31 (from RM0.63 previously). Our TP is based on an unchanged P/E multiple of 11.6x on its FY23f EPS of 2.7 sen. Given the downside and the uncertain outlook after slipping into PN17, we are downgrading our rating on Pharmaniaga to SELL (from Buy previously).

Source: Hong Leong Investment Bank Research - 28 Feb 2023