Apex Healthcare (Apex) recorded a strong set of results for 9M18, with revenue and core net profit growing by 5% yoy and 35% yoy respectively. The strong earnings growth was supported by margin improvements on a better product mix and stellar growth in share of associates’ earnings. Mostly due to a lower-than-expected effective tax rate, Apex’s earnings tracked ahead of our and consensus estimates. We continue to like Apex due to its solid growth prospects, supported by the impending commissioning of SPP NOVO and its established delivery network. Maintain BUY with unchanged TP of RM10.20.

9M18 Earnings Tracking Ahead of Estimates

Apex’s 9M18 earnings came in tracking ahead of our and consensus full year forecasts, mainly due to a lower effective tax rate and better than expected EBIT margins in the wholesale and distribution segment. Notwithstanding this, 9M18 earnings came in solid, with revenue growing by 5% yoy and strong growth coming from private sector pharmaceutical and consumer healthcare products. Likewise, margins also improved due to a better product mix recorded. Share of associates’ earnings growth also contributed to the earnings growth and lower effective tax rate, mainly due to growing orders seen at Straits Apex Sdn Bhd.

Emerging Catalysts

Apex’s new production facility is on track for commissioning by 1Q19. It would relieve existing utilisation rate of 100% at the adjacent production facility. Meanwhile, we anticipate earnings delivery arising from management’s order visibility to fully utilise the new capacity within 12-18 months of completion. Separately, we believe Apex is a generic drug manufacturer with an established delivery network across Malaysia. Among the local drug producers, it is best poised to benefit from impending changes to domestic healthcare policies.

Maintain BUY and TP of RM10.20

In view of earnings tracking ahead of our estimates, we make slight adjustments to our effective tax rate and margins for the wholesale and distribution segment and adjust our FY18E core net profit estimates by 7.4% and marginally for FY19E. We maintain our BUY rating and TP of RM10.20, based on an unchanged 2019E PER of 20x. We like Apex for its consistent execution which 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 - 16 Nov 2018