Apex Healthcare’s 1Q18 net profit of RM13.2m (+31% yoy) came in broadly in line with our expectation (28% of our full-year forecast), underpinned by stellar growth of its in-house branded products and higher contribution from its associate company, Straits Apex. Maintain BUY rating with a higher TP of RM8.00 after rolling forward valuation to 2019E based on an unchanged PE of 16x.

1Q18’s Strong Earnings Growth - in Line With Expectations

1Q18 revenue grew by 9% yoy to RM168.4m helped by strong contributions from the sale of in-house branded pharmaceutical products to the public sector, export and contract manufacturing services. As in-house products enjoys higher margin than third-party products, 1Q18 EBIT margin expanded 1.1ppts to 8.8%, resulting in a 25% yoy growth in EBIT. Its share of results from an associate rose to RM1.6m vs RM1m in 1Q17 as Straits Apex Sdn Bhd continued to broaden its customer base. Therefore, 1Q18 started off strongly with a 31% yoy growth in net profit to RM13.2m, accounting for 28% of our and street forecast. We view the results in line as first quarter’s earnings tend to be stronger seasonally due to restocking of pharmaceutical products in hospitals, pharmacies and clinics.

In-house Brands Drove Strong Sales in M&M Division

During 1Q18, the sales of its manufacturing and marketing (M&M) division increased by 38% yoy driven by higher sales of in-house products while the wholesale and distribution division’s sales grew steadily by 5% on the back of stable demand on pharmaceutical products. EBIT margins for these 2 divisions were relatively stable at 31% and 3.5% respectively. Also, the completion of SPP NOVO will be delayed slightly by 1 quarter to 4Q18. We expect more meaningful contribution of SPP NOVO beyond 2018.

Maintain BUY With Higher TP of RM8.00

We tweaked the earnings marginally by 1% after updating actual figures from 2017’s annual report. After rolling forward valuations, we maintain our BUY rating with a higher TP of RM8 (from RM6.40) based on an unchanged 16x 2019E EPS. We continue to like Apex for its solid execution and favourable outlook driven by its new SPP NOVO plant. Key investment risks include delay of the SPP NOVO completion, product recall risks, competition risks, and low liquidity risks.

Source: Affin Hwang Research - 25 May 2018