• 2Q20 core net profit slipped by 6.7% qoq / 1.8% yoy to RM12.7m due to lower revenue from the manufacturing segment, partly cushioned by higher contributions from the wholesale & distribution business.
• Cumulatively, 6M20 core net profit grew by 8.4% to RM26.2m on strong demand for pandemic-related products; above our expectations.
• We raised our 2020-22E EPS by 4-16% and increase our PT to RM2.75. Maintain SELL due to its rich valuations - at 29x 2021E PER, Apex is now trading at 5 standard deviations above its 5-year average PER of 14x.

2Q20 Earnings Slipped by 6.7% Qoq Due to Lower Manufacturing Revenue

Apex’s 2Q20 revenue fell by 9.6% qoq due to lower demand from clinics and private hospitals where orders had declined after strong sales in 1Q20 when both stocked up their inventories. Elsewhere, demand for pandemic-related products (ie. face masks, thermometers, vitamin C and hand sanitisers) was strong during the early part of 2Q20 but has since moderated. Overall, the lower revenue led to a lower core net profit of RM12.7m (-6.8% qoq).

6M20 Core Net Profit of RM26.2m (+8.4% Yoy) Was Above Expectations

Cumulatively, Apex’s 6M20 core net profit grew by 8.4% yoy to RM26.2m on the back of higher revenue of RM368m (+9.0% yoy) and a higher EBITDA margin of 10.7% (+0.9 ppt), driven by strong demand from pandemic-related products. Overall, the results were above the market and our expectations – Apex’s 6M20 core net profit account for 49% of consensus and 53% of our prior earnings forecasts for the year. The earnings beat was due to stronger-than-expected margin for the wholesale & distribution business and lower-than-expected disruption to its manufacturing segment during the MCO period.

Raising 2020-22E EPS by 4-16%, Maintain SELL on Rich Valuation

We raise our 2020-22 EPS forecasts by 4-16% after incorporating: (i) higher revenue and profit margin assumptions for the wholesale & distribution segment in anticipation of firm demand for pandemic-related products; and (ii) higher 2020E revenue from the manufacturing segment due to limited disruption during the MCO period. In tandem, we raised our TP to RM2.75 (from RM2.55) based on an unchanged 21.5x 2021E EPS. Maintain SELL. At 29x 2021E PER, Apex is trading at 5 standard deviations above its 5-year average PER of 14x, and looks rich. Key risk: stronger-than-expected earnings.

Source: Affin Hwang Research - 27 Aug 2020