We are of the view that YSP Southeast Asia (YSP) is well-positioned to capture on new developments in the pharmaceutical sector, i.e. liberalisation in contract procurements and a new health scheme. Meanwhile, we continue to like the YSP for its undemanding valuations (trading at 9.4x P/E, below 5-year mean of 11x), export-driven growth and improving sector prospects. Maintain BUY, with our TP of RM3.70 unchanged (derived based on a 14x target P/E multiple on 2019E EPS).

Liberalisation of MoH Procurement Contracts – a Boon to YSP

Based on YSP’s past track record of securing contracts from the Ministry of Health’s (MoH), its chances have been low, i.e. less than 1% out of the government’s annual spending of RM4bn. However, positively, with the potential liberalisation of MoH’s procurement process, this implies that there is potentially further upside to securing more of these contracts. Based on our estimates, an additional RM10m in revenue from new contracts could potentially raise our FY19 EPS estimate by 5%. YSP’s overall competitiveness, including an operating margin of 11.4% (2nd Highest Among Listed Peers) Lends Further Credibility to Its Chances.

New Health Scheme Could be a Boost to Generic Producers

Potential implementation of a new health scheme, Peduli Sihat, could prove to be an immediate boon to private pharmaceutical spending. It is expected to drive demand for generic drugs, benefitting generic producers such as YSP. To recap, the scheme involves assistance of RM500 annually to each B40 households nationwide. The pharmaceutical component could amount to ~RM500m or 10% of existing RM5bn of private pharmaceutical spending.

Maintain BUY Rating and TP of RM3.70

Current valuations appear undemanding at a 9.4x FY18E P/E multiple, below both its 5-year historical P/E average of 11.0x (on a forward-basis) and peer average of 13.0x (Figure 9). We believe that our target price of RM3.70, based on an unchanged target P/E of 14x (+1 std of 5-year average) on 2019E EPS more appropriately captures YSP’s improving underlying value, whereby catalysts will be driven by a potentially increasing export market (41% of total revenue by FY20E) in the foreseeable future. Maintain BUY.

Source: Affin Hwang Research - 22 June 2018