YSP’s 9M18 earnings came in within expectations. The stellar 57% yoy earnings growth was supported by strong sales volumes and a favourable product mix predominantly driven by the domestic market. However, 3Q18 margins took a slight dip on a qoq basis despite higher revenue due to changes in the product mix. Maintain BUY with an unchanged TP of RM4.02.

9M18 Earnings Within Expectations

YSP’s 9M18 core net profit came in at RM26.9m (+48% yoy), which we deem to be in line with our estimate at 71% of our full-year forecast. Revenue grew strongly by 10% yoy supported by strong sales volumes and a favourable product mix, predominantly from the domestic market. The manufacturing segment was a key driver, with external sales growing at a commendable 13% yoy for 9M18. Due to better economies of scale and better product mix, the 9M18 EBITDA margin expanded by 4.4ppt yoy.

Dip in Margins on Qoq Basis

Revenue grew by 8% qoq, mainly supported by higher domestic sales. However, YSP recorded a slight dip in the EBITDA margin (-7 ppt), mainly due to a less favourable product mix which caused earnings to decline by 38% qoq, but also coming off a high base recorded in 2Q18.

Domestic Market Drives Earnings

Domestic sales were the key driver for revenue growth in 9M18, accounting for 74% of total sales compared to 72% in FY17. The export market was a mixed bag but recorded a blended growth of 1.7% yoy for 9M18, driven by a jump in sales to Cambodia and Brunei, offset by a slump seen in Vietnam and Myanmar, among others.

Maintain BUY and TP of RM4.02

We make no changes to our estimates. We continue to like YSP for its bargain valuations against the backdrop of the coming favourable healthcare policy, which we think could benefit generic drug producers such as YSP. Higher export-oriented exposure (38% of total revenue by 2020E), underpinning YSP’s prospects for the foreseeable future, is a boon as well. We maintain our BUY rating on YSP with a target price of RM4.02 based on an unchanged 14x 2019E PER. Key downside risks: slowdown in export sales, product recalls, and regulatory risks.

Source: Affin Hwang Research - 21 Nov 2018