Apex Healthcare (Apex)’s 2018 core net profit came in above expectations, mostly due to the reinvestment allowance arising from its investment in the new Oral Solid dosage plant, SPP NOVO. Results were in line with our estimates at both revenue and PBT levels. Apex declared a higher final dividend of 7.0sen per share, bringing full-year DPS to 13.5sen, or a payout of 27% (2017: 12.0sen at 32%). Separately, the Group also announced the plan to undertake a 3-for-1 bonus issue, expected to be completed by 2Q19. We maintain our BUY rating with a marginally higher TP of RM10.34 based on 20x 2019E EPS.

4Q18 Lifted by Reinvestment Allowance

4Q18 revenue grew by 7% yoy mainly driven by the growth in pharmaceutical sales to both private and government sectors. Core net profit surged by 31% yoy due to the reinvestment allowance and hence core net profit margin was higher by 2ppts to 11% in 4Q18. Note that Apex has received the certificate of completion and compliance (CCC) for SPP NOVO and commenced the start-up in 4Q18, and hence start-up expenses for the new plant has also started to clock in.

Stellar Growth in 2018

2018 core net profit grew 34% yoy to RM60.2m, making up 112% and 111% of our and consensus’ estimates respectively. The positive variance from our forecast was due to the reinvestment allowance arising from the Group’s investment in SPP NOVO. Full-year revenue continued to grow at 5% yoy, mainly attributed to the improved contributions from pharmaceuticals sales to the government sector, contract manufacturing as well as sales of Group branded pharmaceuticals to the private sector which was supported by new product launches. Notably, share of results from associated company grew by 44% to RM7.8m as Straits Apex Sdn Bhd continued to broaden its customer base and increase capacity utilisation. This also gave a boost to the 24% growth in PBT in 2018.

Gearing Up for Expansion

We note that the Group has started to undertake loans to part finance the construction of its new plant, SPP NOVO, which saw an increase of RM30m in its total borrowings as at end-2018. We are not overly-concern on the gearing however, as the Group is still sitting firmly on a net cash position of RM81.2m (or 44 sen per share) and its current gearing ratio stands at a minimal level of 0.08x as at 31 Dec 2018. Capex spent in 2018 was around RM62.6m (2017: RM37.1m), primarily in relation to the construction of SPP NOVO.

Source: Affin Hwang Research - 1 Mar 2019