Apex Healthcare reported a decent set of results – 1Q20 core net profit grew by 19% yoy to RM13.6m on the back of higher revenue (+8.5% yoy) given the heightened market demand triggered by the growing Covid-19 pandemic. The results were ahead of our expectations but below consensus forecasts. We raised our 2020-22 earnings forecasts by 9-11% to factor in the solid 1Q20 results, a more robust revenue outlook, and resilient profit margins, thereby lifting our 12-month TP to RM2.10 based on an 18x 2021E PER. Nonetheless, we are maintaining our SELL rating on Apex due to its rich valuations. At a 25x 2021E PER, Apex is now trading at 3 standard deviations above its 6-year average and looks pricey. This note marks a transfer of coverage.

Higher Revenue Lifted 1Q20 Profit

Apex’s 1Q20 revenue grew by 8.5% yoy to RM193.3m driven by higher contributions from both the manufacturing (+2.4% to RM12.1m) and wholesale & distribution segments (+9.4% to RM179.6m). The higher revenue was driven by strong sales to both the private and government sectors in Malaysia and Singapore due to heightened market demand triggered by the growing Covid-19 pandemic which led to increased purchases by customers in order to ensure uninterrupted supplies. As a result and topped by resilient profit margins, Apex’s 1Q20 core net profit grew by 19.4% to RM13.6m, accounting for 21% of the street’s and 31% of our prior full-year earnings forecasts.

Raising 2020-22 EPS Forecasts by 9-11%

We raise our 2020-21E earnings by 9-11% to factor in the strong 1Q20 results, robust revenue outlook and resilient profit margins for the wholesale & distribution business. That said, we are still expecting a yoy decline in Apex’s 2020 earnings due to operational disruptions (manufacturing activities / commissioning of new lines) arising from the MCO.

Lifting Price Target But Maintain SELL Due to Rich Valuations

We lift our 12-month price target to RM2.10 (from RM1.50) based on an 18x 2021E PER (from 14x). Taking into consideration its relatively resilient earnings and strong investor demand for defensive healthcare / pharmaceutical stocks, we now pegged Apex at 1 standard deviation above its 6-year average PER of 14x. Nevertheless, we maintain our SELL call due to its rich valuation. Key risk: stronger-than-expected earnings.

Source: Affin Hwang Research - 22 May 2020