YSP’s 1Q18 core net profit came in strong, making up 35% of our forecasts. Nonetheless, we deem this to be within expectations as the first quarter tends to be stronger. The growth in core net profit came on the back of higher sales in local markets, which drove revenue higher by 6% yoy and 5% qoq. The manufacturing segment saw the strongest growth, with revenue increasing by 5% yoy. Maintain BUY with a higher TP of RM3.70 as we roll forward our earnings based on 14x 2019E EPS.

Domestic Sales and Exports Driving 1Q18 Sales

YSP’s 1Q18 revenue improved by 6% yoy and 5% qoq mainly underpinned by higher demand for its generic drugs driving increases in sales volume for the local market. The manufacturing segment especially recorded decent growth in revenue (+5% yoy) and subsequently better PBT (+8% yoy) on improvements in operating costs and better product mix during 1Q18 vs 1Q17. This however was tempered by lower revenue (-4% yoy) and PBT (-52% yoy) recorded in the trading segment due to higher operating costs in this segment.

Exceptional Items Distorted 1Q18 Performance

Due to RM3.9m in forex losses recorded in 1Q18, headline net profit declined by -24% yoy. However, stripping this off, core net profit recorded a strong 25% growth yoy and 40% growth qoq to RM10.5m, which accounts for 35% of our full year estimates. We deem this to be in line with our expectations as we do note that 1Q tends to be stronger due to the restocking of drugs by hospitals and clinics as well as upward revisions in ASPs during the start of the year. (this note marks a transfer of coverage)

Maintain BUY With Revised TP of RM3.70

We maintain our 2018-20E earnings estimates and forecast a 2017-19E core EPS CAGR of 21% on the generic pharmaceutical growth in Malaysia and YSP’s potential overseas sales. We maintain our BUY rating on YSP with a revised target price of RM3.70 as we roll forward our earnings based on 14x 2019E EPS. We view that YSP’s valuation, at 9x 2019E PE, is still attractive among the pharmaceutical peers listed on Bursa Malaysia, trading at a weighted average of 18x. Key downside risks: more intense competition, product recalls, and regulatory risks.

Source: Affin Hwang Research - 28 May 2018