Apex’s 9M17 net profit of RM31.7m (+12% yoy) came in slightly above our expectation - 82% of our full year forecast, due to a lower tax rate in 3Q17. Top line grew by 7% yoy on the back of increased contributions from pharmaceutical sales to the government sector and contract manufacturing services. As we expect stronger earnings growth from FY18 onwards when the new plant is completed, we maintain BUY with TP of RM6.10 based on 16x 2018 EPS.

9M17 Net Profit Was Slightly Above Our Expectation

Apex’s 9M17 revenue grew by 7% yoy to RM467.7m driven by the increased contributions from pharmaceutical sales to the government sector and contract manufacturing. Its gross profit increased by 6% yoy to RM102m in tandem with revenue growth and its opex was within budget. As a result, 9M17 PBT of RM39.7mn (+9.7% yoy) was broadly in line and accounted for 78% of our full-year estimates. However, the reinvestment allowance tax incentives granted for qualifying capex resulted in a lowerthan-expected tax rate of 15% in 3Q17 (vs. 23.4% in 2Q17 and 24% in 3Q16), bringing 9M17 net profit to RM31.7m (+12% yoy). This was slightly above ours and street expectation, accounting for 82% of full year-forecast.

Segmental Breakdown

For 9M17, the sales of manufacturing and marketing division and wholesale and distribution division increased by 16.4% yoy and 6.6% yoy respectively. Apex’s 9M17 PBT margin was relatively stable at 8.5% (vs. 8.3% in 9M16) as the manufacturing and marketing division’s EBIT margin expanded marginally by 1ppts to 28.5%. We believe this is driven by strong demand for its in-house products and better production yield rate.

Maintain BUY With Unchanged TP of RM6.10

We maintain our FY17-19 earnings and we continue to like the company for its solid execution and favourable outlook driven by its new SPP NOVO plant, which is expected to be completed in 3Q18. We maintain a BUY rating and 12-month TP of RM6.10 based on 16x 2018E EPS, which we view as undemanding given out forecast of a 2016-2020E EPS CAGR of 18%. Key investment risks include delay of SPP NOVO completion, product recall risks, competition risks, and low liquidity risks.

Source: Affin Hwang Research - 15 Nov 2017