Despite recording higher revenue, Apex Healthcare’s core net profit declined 13.8% yoy in 1Q19, mainly due to higher start-up expenses from its new Oral Solid dosage plant, SPP NOVO, as well as lower contributions from its associate. The weak performance was within expectations. We maintain our HOLD rating on Apex with a lower TP of RM8.42 as a result of a cut in our target PER in view of the near-term earnings weakness due to the start-up expenses from SPP NOVO.

Impacted by Start-up Expenses From SPP NOVO

1Q19 revenue grew 5.8% yoy to RM178.2m, making up 22% and 21% of our and consensus estimates respectively. The higher revenue was driven by the stronger contributions from: i) private-sector sales of Groupbranded pharmaceuticals in Malaysia, ii) contract manufacturing, and iii) distribution to pharmaceutical and consumer healthcare agencies. Core net profit, however, fell 13.8% yoy to RM11.4m in 1Q19, mainly due to: i) higher operating expenses arising from the start-up of SPP NOVO, and ii) a lower contribution from its 40%-owned associate, Straits Apex Sdn Bhd, which halved yoy to RM0.8m, due to lower sales. On a positive note, Apex indicated that the associate’s secured orders in hand for fulfilment over the next 2 quarters stand at good levels.

Received Regulatory Approval for SPP NOVO

The Group has received regulatory approval from the National Pharmaceutical Regulatory Agency (NPRA) on 16 May and should be able to start selling products manufactured by SPP NOVO. While the commencement of sales should help to partly mitigate the start-up expenses, we expect the new plant to be in a gestation period for at least 1-2 years, which will adversely impact the Group’s earnings in 2019E.

Maintain HOLD With a Lower TP of RM8.42

Given the weak near-term earnings due to the start-up costs, we lower our PER target to 17x (from 20x), in line with regional pharmaceutical peers’ average PER of 17x (Fig 2). Despite rolling forward our valuation horizon to 2020E, we lower our TP to RM8.42 (from RM8.81) as a result of our lower target PER. We maintain our EPS forecasts and HOLD rating on Apex. The proposed 3-for-1 bonus issue has been approved by its shareholders and Bursa Malaysia. Upside risks: lower-than-expected startup expenses and shorter-than expected gestation period for SPP NOVO. Downside risks: higher-than-expected start-up expenses and product recall risk.

Source: Affin Hwang Research - 24 May 2019