YSP reported a higher 4Q18 revenue of RM76.0m (+12% yoy) and headline net profit of RM6.8m (+34% yoy). After stripping off the exceptional items (i.e. forex impact and write-offs of receivables and inventories) however, 4Q18 core net profit slipped by 30% yoy to RM5.3m, bringing full-year 2018 core net profit to RM32.4m (+24% yoy). Overall, 2018 results were within expectations, making up 98% and 96% of our and street’s estimates respectively. Maintain BUY with a lower TP of RM3.85.

4Q18 Dragged by Higher Cost of Sales

Despite recording higher revenue of RM76.0m (+12% yoy) as a result of the increase in demand from local market, YSP’s 4Q18 core net profit declined by 30% yoy to RM5.3m. While the main culprit of the drop in 4Q18 core net profit was not mentioned in the quarter result announcement, we suspect that it was mainly due to the higher cost of sales as the gross profit margin dropped significantly, or by 5ppts yoy to 44% in 4Q18 (4Q17: 49%).

2018 Core Earnings Within Expectations

2018 core net profit of RM32.4m (+24% yoy) came in within expectations, making up 98% and 96% of our and street’s estimates respectively. 2018 revenue and core net profit grew by 10% and 24% yoy respectively, mainly driven by higher contribution from the manufacturing segment (+15%) on the back of stronger demand. Overall, full-year core net profit margin grew by 1ppt to 11% in 2018 as a result of favourable product mix coupled with lower cost of sales and better economies of sales.

Maintain BUY With a Lower TP of RM3.85

Our 2019-20E EPS estimates is lowered by 2-5% as we made some minor housekeeping adjustments to our model. In addition, we also adjusted the number of shares to account for the employee share option scheme (ESOS). Consequently, TP is lowered to RM3.85. 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. We maintain our BUY rating on YSP with a lower target price of RM3.85 based on an unchanged 14x 2019E PER. Downside risks: slowdown in export sales, product recalls, and regulatory risks.

Source: Affin Hwang Research - 27 Feb 2019