Apex Healthcare (Apex) is an integrated pharmaceutical company. We like the company for its solid earnings delivery and strong balance sheet (net cash of RM79m). The new oral solid-dosage plant that will be completed in 1H18 and the recent EU GMP certification award are positive catalysts. We forecast a 2016-20E EPS CAGR of 18%. We initiate coverage with a Buy rating and TP of RM6.10.

Stable Growth Since IPO

Since listing in 2000, Apex’s revenue and core net profit have grown at 10% and 9% CAGRs, reaching RM580m and RM33.7m respectively in 2016. We forecast a top-line CAGR of 11% over 2016-20, in line with the high-single-digit growth rate of the pharmaceutical industry.

Doubling of Capacity With New Oral Solid-dosage Manufacturing Plant

Apex is currently building a new oral solid-dosage plant, named SPP NOVO, which is expected to double production capacity by 1H18. Apex has also been awarded EU GMP certification, which is mandatory to penetrate into the EU and other developed markets. The contribution from the new plant should be more meaningful from 2019 and we forecast the manufacturing division’s revenue to grow at a 15% CAGR over 2016-20.

Growing Contribution From In-house Products

26% of revenue is derived from Apex’s in-house brands while the rest is from third-party products. Going forward, Apex aims to increase the contribution of in-house products, especially the Xepa-branded products once SPP NOVO is completed. We forecast the contribution to rise up to 30% of total revenue by 2020. This should contribute positively to the bottom line as in-house products enjoy much better margins.

Initiate Coverage With a BUY Rating and TP of RM6.10

We initiate coverage with a Buy rating and 12-month TP of RM6.10 based on a 2018E PER of 16x. We think that the valuation is undemanding, given our forecast of a 2016-20E EPS CAGR of 18%. We like the company for i) its solid execution in the past, ii) favourable outlook driven by its new SPP NOVO plant, iii) business strategy to expand its foray into the European pharmaceutical market; and iv) healthy balance sheet (net cash of RM0.68sen/share). Key risks include delay of SPP NOVO, product recall risk, competition risk, and low liquidity risk.

Source: Affin Hwang Research - 31 Oct 2017