Apex Healthcare’s (Apex) recorded stronger revenue (+9% yoy) and core net profit (+5.4% yoy) in 3Q19, with 9M19 results coming in above expectations. This is despite higher start-up costs from its new Oral Solid dosage plant, SPP NOVO, and lower associate’s contributions. We think the improvement was mainly driven by the commercial production of SPP NOVO since mid-May, which has helped to partially offset the fixed cost of SPP NOVO. We raise our earnings forecast to factor in an earlier contribution from SPP NOVO. We upgrade Apex to BUY with a higher TP of RM2.67.

Stronger Earnings Despite Start-up Expenses From SPP NOVO

3Q19 revenue grew 9% yoy to RM181m, mainly driven by the stronger contributions from: i) both private and public sector sales of Group branded pharmaceuticals, ii) contract manufacturing, and iii) distribution to pharmaceutical and consumer healthcare agencies. 3Q19 core net profit grew 5.4% yoy and 26.2% qoq despite higher operating and finance cost arising from the start-up of SPP NOVO and lower contributions from associate. Though Apex’s 9M19 core net profit accounts for 76-77% of consensus and our estimates, we think the results were above expectations as we expect a stronger performance in the coming quarters.

Turning More Positive, Expect Margins to Improve

Recall that Apex had received regulatory approval to start commercial production on 16 May 2019. We believe the commercial production of SPP NOVO has helped to partially offset the start-up costs of SPP NOVO, which include finance cost, depreciation and other operating expenses. Following a weak 1H19 and improvement in 3Q19, we are now turning more positive and expecting the margin to improve with an earlier turnaround for SPP NOVO. The group’s core net profit margin has improved to 8.9% in 3Q19 from 8.0% in 2Q19, though still slightly below 3Q18’s 9.2%.

Upgrade to BUY With a Higher TP of RM2.67

We raise our earnings forecasts by 8-27% for FY19-21E as we expect SPP NOVO to turnaround earlier (vs. previous expectation of a breakeven by end of next year) given the commercial sales of SPP NOVO. We upgrade our call on Apex to BUY with a higher TP of RM2.67. We like Apex for its solid growth prospects, supported by the commissioning of SPP NOVO and its established delivery network. Downside risks: higherthan-expected start-up expenses and product recall risk

Source: Affin Hwang Research - 22 Nov 2019