YSP’s 1H17 net profit of RM11.7m came in below our expectation, accounting for 37% of our full year forecast. While the revenue growth and EBIT margin were broadly in line, the cause of disappointment came mainly from lower other income, which arose from forex gain. We cut our earnings by 16% to exclude forex gain given that it is non-core. We maintain BUY with TP of RM3.24 based on higher of 14x FY18PE.

1H17 Sales Were Mainly Driven by Overseas Sales

2Q17 revenue grew by 16% yoy to RM60m, bringing 1H17 revenue to RM127.4m (+8% yoy). It declined 11% qoq as first quarter is seasonally stronger for the company. The revenue growth was still mostly driven by export sales while the demand from domestic market remained lacklustre. This is line with our expectation, accounting for 50% of our full-year sales forecast. Gross margin in 2Q17 was slightly weaker at 43% vs 48% in 2Q16 due to a change of product mix, which we suspect is due to higher sales of non-prescriptive drugs. However, 1H17 gross margin of 44.6% was broadly in-line with our estimates of 45.6%.

Net Profit of Was Below Expectation

1H17 net profit of RM11.7m came in below our expectation, accounting for 37% of our full year forecast. This was due to lower than expected other income. At the operating level, results were broadly within expectations. YSP reported EBIT margin of 12.6% in 1H17 which was broadly in line as management has managed operating cost well.

Maintain BUY With TP of RM3.24

We cut our FY17-19 earnings by 16% to lower other income items such as non-core forex gains. We still like YSP for its growth profile and defensive nature of pharmaceutical sector. We think that fundamentally nothing has changed and we still maintain our forecast of a 2017-19E EPS CAGR of 17% on the back of generic pharmaceutical growth in Malaysia and overseas sales. Although we cut our earnings by 16%, we maintain our TP of RM3.24 as we raise the target PE multiple to 14x (from 12x on 2018 EPS previously). Trading at 14x PE (+1 std of 5-year average), we think that YSP’s valuation is still attractive among the pharmaceutical peers listed in Bursa Malaysia, which trade at the weighted average of 19x PE.

Source: Affin Hwang Research - 30 Aug 2017