Despite recording a slightly stronger revenue, Apex Healthcare’s (Apex) core net profit fell 6% yoy in 2Q19, mainly due to higher start-up expenses from its new Oral Solid dosage plant, SPP NOVO. The weak results were within our expectation as SPP NOVO is expected to be in a gestation period for at least 1-2 years. Apex declared a higher DPS of 1.70sen for the quarter (2Q18: 1.63sen). We make no changes to our earnings forecasts and maintain our HOLD rating on Apex with a 12- month TP of RM2.11 (adjusted for the bonus issue).

Weaker Earnings Due to Start-up Expenses From SPP NOVO…

2Q19 revenue grew 2% yoy to RM159m, mainly driven by its manufacturing (+2% yoy) and distribution segments (+2% yoy). Core net profit, however, fell 6% yoy to RM13m in 2Q19, mainly due to higher operating and finance expenses arising from the start-up of SPP NOVO. The results came in within expectation with 6M19 core net profit accounting for 47-48% of the street and our full-year estimates.

… Partly Offset by Stronger Contributions From Associate

The weaker performance was partly offset by stronger contributions from the group’s 40%-owned associate, Straits Apex Sdn Bhd, which grew by 121% yoy to RM3.3m on improved sales. The associate company has managed to secure new customers as a result of the US-China trade tension as most of its customers are US multinational corporations.

In the Midst of Transferring Products to SPP NOVO

To recap, Apex had received regulatory approval to start commercial production on 16 May 2019 and is currently in the midst of transferring high-volume oral solid dosage products from its existing plant to SPP NOVO, with a target to transfer 30 products. While we are positive on the progress, we expect the new plant to be in a gestation period for at least 1-2 years, which will adversely impact its earnings in the near term.

Maintain HOLD With TP of RM2.11

All in, we maintain our earnings forecasts and HOLD call on Apex with an adjusted TP of RM2.11 (from RM8.42, after adjusting for the 3-for-1 bonus issue), based on an unchanged 2020E target PER of 17x. Upside risk: lower-than-expected start-up expenses for SPP NOVO. Downside risks: higher-than-expected start-up expenses, implementation of drug price control and product recall risk.

Source: Affin Hwang Research - 22 Aug 2019