We remain convinced over Apex’s delivery on SPP NOVO and subsequent fulfilment of incoming capacity. The bright execution and positive earnings outlook should well deserve a premium valuation to local peers. We maintain our Buy rating and raise our TP to RM10.20 (from RM8.16) to reflect our higher PE peg of 20x, in line with its regional peers instead. We like the company for its defensive, yet attractive, earnings (2017-20E EPS CAGR of 18%), execution and strong balance sheet.

Further Upside to the Largest Pharmaceutical Company in Malaysia

Apex has rerated notably since it surprised the market with its 2Q results. It is now the largest pharmaceutical company by market capitalisation in Malaysia. We believe there is further upside, supported by its execution and visible utilisation of its new expansion. The new production facility, SPP NOVO has floor space 3x that of existing production. This will fuel Apex’s medium term ambitions. However, for now, only one-third of SPP Novo will be utilised but that alone is sufficient to double 2018’s oral solid production capacity. We are also buoyed on management’s guidance of fully utilising new capacity within 12-18 months of completion by 1Q19.

Shot in the Arm From Associate

Acquired in 2013, Straits Apex (40% owned by Apex) is beginning to realise its potential. The contract manufacturer of surgical grade orthopaedic devices was loss making until FY16 and turned profitable in FY17. Going forward, we expect increased contribution being sustained given the recurring nature of orthopaedic contracts once having met stringent standards with its recent new customers. We expect Straits Apex to supplement 11%/9%/8% to FY18/19/20E PBT earnings respectively.

Maintain BUY Rating and Higher 12-month TP of RM10.20

Given Apex’s earnings growth outlook and track record, we believe its valuations should well trade at a PE premium to local peers (14x) and instead, aligned to regional pharmaceutical peers instead (19x). We raise our TP to RM10.20 based on a 2019E PER of 20x (or a 10% premium to our target PE of 18.4x for the KLCI) from 16x and maintain our Buy rating. We like Apex for: i) its well measured execution, ii) business strategy to expand into the European pharmaceutical market; and iii) healthy balance sheet (net cash of RM0.73sen/share). Key risks include a delay of SPP NOVO, product recalls, and low liquidity.

Source: Affin Hwang Research - 5 Oct 2018