Apex Healthcare’s 2019 core net profit was within expectations. The group’s 4Q19 revenue grew 5% yoy, but core net profit declined 17% yoy mainly due to the absence of reinvestment allowance. Sequentially, revenue and earnings was softer due to high base in 3Q19 on the back of higher masks sales, seasonality factor, and higher effective tax rate. We cut our earnings forecast by 5% to factor in a more cautious macro environment but reiterate BUY on Apex with a higher TP of RM2.82 as we roll forward our valuation base to 2021E. We expect 2020 to be a recovery year for Apex as it continues to ramp-up the production of SPP NOVO. Apex declared a final DPS of 2.0sen, bringing full-year DPS to 3.7sen or a payout of 33% (2018: payout of 27%).

Lower Core Net Profit Due to Absence of Reinvestment Allowance

4Q19 revenue grew 5% yoy to RM171m, mainly driven by stronger contribution from i) contract manufacturing, and ii) pharmaceutical sales to both private and public sectors. Notably, its manufacturing segment’s revenue grew 29% yoy to RM18m and achieved its best ever quarter on the back of the ramp-up in production of SPP NOVO. The group’s 4Q19 core net profit however declined 17% yoy mainly due to the absence of reinvestment allowance which previously had lifted its earnings in 4Q18.

Softer Sequential Performance Due to High Base in 3Q19

Revenue and earnings were softer qoq in 4Q19 due to a combination of a high base in 3Q19 on the back of stronger demand for face masks. On a positive note, 4Q19 EBITDA margin has improved 1.3ppt qoq to 12.8%. We believe that the commercial production of SPP NOVO has helped to partially offset the fixed costs of SPP NOVO. The lower contribution from associate during the quarter was attributed to the postponement of fulfilment dates for a portion of secured orders to 2020 by customers and higher operating costs due to the commencement of the associate’s third new manufacturing facility in Penang.

Maintain BUY With a Higher TP of RM2.82

We trim our 2020-21E earnings by 5% to factor in a more cautious macro environment due to negative impact from Covid-19. We maintain our BUY call on Apex with a higher TP of RM2.82 (from RM2.67) on an unchanged target multiple of 17x as we roll forward our valuation base to 2021E earnings which we believe will be less affected by Covid-19. We continue to like Apex for its solid growth prospects led by its strong execution, stable earnings and added growth from the turnaround of SPP NOVO. Key risks: higher-than-expected start-up costs, product recall risk.

Source: Affin Hwang Research - 21 Feb 2020