We expect 2019 to be a challenging year for Apex Healthcare given the: i) additional start-up expenses from Apex’s new plant, SPP NOVO, ii) later-than-expected kick-start of sales from SPP NOVO, and iii) absence of the reinvestment allowance. In view of this, we cut our earnings estimates by 15-24% for 2019-21E and downgrade our call on Apex to HOLD from Buy with a lower TP of RM8.81. While we look forward to the contribution from SPP NOVO and remain upbeat on Apex’s longterm prospects, we expect near-term earnings to be weak, given the estimated 1-2 years’ gestation period for SPP NOVO.

Expecting Near-term Earnings Weakness

Apex’s earnings could likely be weaker in the coming quarters. As it is, 4Q18 PBT margin contracted 0.4ppt yoy and 1.0ppt qoq, impacted by start-up and related costs from its new plant, SPP NOVO. Moreover, we understand that the Group can only commence selling the products manufactured by SPP NOVO after receiving approval from the NPRA, expected at the latest by late-2Q19. In addition, the Group has already fully utilised its reinvestment allowance, hence the effective tax rate will normalise to previous levels of c.24-25% from 2019 onwards (2018: 15%).

Biting the Bullet for Long-term Growth

In the long term, we believe that the Group’s prospects remain intact, underpinned by: i) SPP NOVO, where the potential capacity of its oral solid production may quadruple existing capacity, ii) the continuous expansion of its portfolio of Group-branded products, which enjoy higher margins, and iii) its growing orthopaedic devices manufacturing business.

Downgrade to HOLD With Lower TP of RM8.81

We lower our earnings estimates by 15-24% for 2019-21E to account for the start-up expenses for SPP NOVO. While we remain upbeat on Apex’s long-term prospects, the Group’s near-term earnings are expected to show weakness given the estimated 1-2 years’ gestation period for SPP NOVO. We downgrade our call on Apex Healthcare to HOLD from Buy with a lower TP of RM8.81 (from RM10.34), based on an unchanged 2019E PER of 20x. Given the estimated lower payout and the recent surge in share price, dividend yields are not attractive at the current level of 1.5-1.9% for 2019-21E. Key upside risks: lower-than-expected start-up expenses and shorter-than expected gestation period for SPP NOVO. Key downside risk: higher-than-expected start-up expenses and product recall risk.

Source: Affin Hwang Research - 25 Mar 2019