We come away buoyed from Apex’s company results briefing. Completion of SPP NOVO is well underway and it would underpin growth over the medium term as well. Sustained contribution from its associate is expected to alleviate earnings too. We like the company for its defensive, yet attractive, earnings (2017-20E EPS CAGR of 17%), execution and strong balance sheet. We maintain our Buy rating and TP of RM8.16.

Interest Surrounds Upcoming SPP NOVO

Apex’s company briefing was conducted Dr. Kee (CEO) and was attended by some 20 analysts and fund managers. Most of the discussion revolved around Apex’s new production facility, SPP NOVO and the fulfilment of its upcoming capacity. We are buoyed over the construction progress, having achieved 98% and 67% completion of internal and external works respectively thus far. Regulatory approvals and permits are expected to be obtained by year end, subsequent to production commencing in 1Q19. Management foresees upcoming doubling of oral solid capacity to be fully utilised within the next 12-18 months, in line with our expectations. However, we pleasantly discovered that SPP NOVO has enough floor space to eventually double anticipated 2019 production capacity. It would underpin Apex’s 6-7 year growth ambition.

Other Key Takeaways

Management foresees its associate, Straits Apex sustaining 1H18 contributions, which had almost doubled yoy. Meanwhile, despite the liberalisation of the procurement of pharmaceuticals by the local government, Apex intends to focus on export sales to supplement growth going forward. Other highlights include minimal risks arising from its forex exposure and minimum wage. We also highlight the possible downside risk to our dividend assumption.

Maintain BUY Rating and 12-month TP of RM8.16

Given a defensive, yet attractive, 2017-20E EPS CAGR of 17%, we maintain our Buy rating and TP of RM8.16 based on a 2019E PER of 16x. We like Apex for: i) its well measured execution, ii) business strategy to expand into the European pharmaceutical market enabled by its new SPP NOVO plant; and iii) healthy balance sheet (net cash of RM0.73sen/share). Key risks include a delay of SPP NOVO, product recall risk, and low liquidity risk.

Other Highlights

1. Production sees a slight delay to commissioning. Commissioning of SPP NOVO is expected for 1Q19, deviating from our previous expectation of 4Q18. However, we maintain our forecasts as management revealed that additional shifts were incorporated to current production, bringing it beyond its full capacity.

2. Sustained increased associate contribution. Straits Apex, 40% owned by Apex, contract manufactures orthopaedic devices. To recap, 1H18 associate contributions grew 84% yoy and expected to be sustained. It was boosted by the acquisition of new customers after succeeding stringent evaluation standards. Based on our assumptions, Straits Apex is expected to handsomely contribute 11%/9%/8% to FY18/19/20E PBT earnings respectively.

3. Minimal minimum wage impact. Apex’s total workforce is 1,200- strong. Production labour is paid well above the RM1,000 minimum wage. However, should minimum wage be raised to the deliberated RM1,500, it is estimated to be a -RM1m or -2% impact to FY19E earnings.

4. Neutral forex exposure. Apex’s forex exposure is net negative to the strengthening of the USD, but minimal. Its export sales which accounts for close to 30% of revenue is offset by imported raw materials such as active pharmaceutical ingredients (API) and excipients (stabilizer).

5. Dividend downside to our assumption. Post completion of SPP NOVO which amounts to RM80m, Apex retains a clean balance sheet with minimal debt. Once capex spending normalises, Apex should generate a FCF in the region of ~RM50m, well sustaining our assumption of a dividend payout of 40% or RM24-28m for FY19-20E. However, it deviates away from Apex’s historical payout of 30%.

6. Competing for government contracts. Revenue derived from the government amounted to 3-4% of 1H18. While management is buoyed by the possibility of liberalisation of the pharmaceutical procurement, they reiterated that the environment and ecosystem remains highly competitive. Further emphasising the focus largely resides in growing its export sales as impetus of growth.

Source: Affin Hwang Research - 20 Aug 2018