Apex Healthcare’s 1H18 net profit exceeded expectations on higher contribution from its associate company, Straits Apex and operational margin expansion. Impending completion of SPP NOVO in 4Q18 is expected to provide new avenues of growth as domestic prospects could be uplifted by potential healthcare policies. We maintain our BUY rating with a higher TP of RM8.15 based on 16x 2019E EPS.

Above Our Expectations

While 1H18 revenue grew by 4.6% yoy, quarterly revenue was flat yoy. Improved pharmaceutical sales to the government sector and export sales were balanced out by subdued private sector sales. Better product mix against marginally better opex resulted in EBITDA margins gaining 1.8ppt to 11.6% for the quarter yoy. Associate contribution doubled while it saw favourable tax treatment at 20.6% (vs. 1HFY17: 22.6%). That said, we expect 2H18 effective tax rate to normalise FY18 to the usual corporate tax rate. These factors combined boosted 1H18 net profit to RM26.9m (32.8% yoy). It exceeded both our and consensus expectations at 57% and 58% of full year estimates respectively.

Catalysts on the Horizon

Apex’s new production facility is on track for commissioning by end FY18, which could catalyse Apex’s valuations. Besides doubling its oral solid capacity, should export sales to intended European drug companies materialise, it would be a new impetus of growth. Domestically, the potential implementation of a new health scheme, Peduli Sihat, could shift public healthcare spending to private clinics. The pharmaceutical component could amount up to ~RM500m, benefitting generic producers such as Apex.

Maintain BUY and TP of RM8.16

We revise our margin and share of associate contribution assumptions to reflect Apex’s improved performance, raising our FY18-20E earnings by 5%-2%. Hence, we derive a higher TP of RM8.16 (from RM8.00 previously) based on an unchanged 2019E PER of 16x, and maintain our Buy rating. Consistent execution and its exciting business strategy to expand into the European pharmaceutical market enabled by its new SPP NOVO plant supports Apex defensive, yet attractive, 2017- 20E EPS CAGR of 17%. Key risks include a delay of SPP NOVO, product recall risk, and low liquidity risk.

Source: Affin Hwang Research - 17 Aug 2018