• Apex is expanding its cold chain distribution capabilities. Post expansion, Apex can distribute a maximum of 2-3m doses of Covid-19 vaccine per annum, if the group is to charter 100% of its capacity for the vaccines.
• Once available, Apex will most likely seize the opportunity to become a wholesaler of Covid-19 vaccines from various manufacturers, instead of focusing on a particular manufacturer as its exclusive distributor.
• Raising 2021-22E EPS forecasts by 3% and upgrading Apex to HOLD. We now peg Apex at higher 2021E PER of 29x after considering the re-rating across the pharmaceutical companies’ valuation and the scarcity premium for quality pharmaceutical companies with a strong earnings track record.

Expanding the Cold Chain Distribution Capabilities

In Singapore, Apex has expanded its current 2-8 °C cold room and acquired a -20 °C freezer room. In Malaysia, Apex is doubling its cold chain distribution capacity, scheduled for completion by end-2020. These expansions are to partly charter for business opportunities in the distribution of Covid-19 vaccines. It was reported that for long-term storage, the Pfizer & BioNTech Covid-19 vaccine needs to be stored at a temperate of -75°C while Moderna’s Covid-19 vaccine can be stored at -20°C. Apex does not have freezer with storage capabilities of -75°C, but management shared that these freezers can be acquired at <100k each should the need rise.

Maximum distribution capacity of 2-3m doses of Covid-19 vaccines per year

Currently, Apex stores various products in its cold chain facility (ie. eye drops and other drugs). Assuming Apex is to stop distributing the current products and focus solely on Covid-19 vaccines (an unlikely scenario), the group can distribute up to 2- 3m doses of Covid-19 vaccines per year (post expansion).

When the Covid-19 vaccines are available, Apex may start as a wholesaler

Apex has been approached by several manufacturers to be the authorised distributor for their upcoming Covid-19 vaccines (work-in-progress). There are many considerations in evaluating these proposals (ie. whether the products will be approved, pricings, efficiencies, requirements, etc) and hence, Apex has not committed to any manufacturer. Instead, the group will likely start off as a wholesaler, where Apex will distribute the Covid-19 vaccines from various manufacturers. As a wholesaler, the distribution of Covid-19 vaccines may deliver a similar margin to its existing wholesale business at around 10%.

Covid-19 Vaccine for Malaysia Still a Long Way to Go, Reported NST

The NST reported that it is still a long way for the Covid-19 vaccines to be made available for Malaysia. Health director-general Dr Noor Hisham Abdullah said there were 10 companies claiming to have come close to finding a vaccine, however, none had actually published their clinical trial data to be reviewed, reported NST. Meanwhile, deputy director-general of health Dr Hishamshah Mohd Ibrahim said that avaccine approval was not a simple process, as it needed to undergo various levels of testing and approval from multiple agencies. To recap, the Ministry of Health of Malaysia had earlier said that the ministry is studying 10 Covid-19 vaccines that have entered into phase 3 trials, including 4 viral vector vaccines, 3 inactivated virus vaccine, 2 RNA based vaccine and 1 virus like particle vaccine. However, the ministry has not provided any guidance on the availability date / schedule.

Trimming 2020E Forecasts But Raising 2021-22E EPS by 3%

We have revised our 2020/21/22E core EPS forecasts by -3%/+3%/+3% after incorporating: (i) weaker revenue from the manufacturing segment due to slow demand growth and delays in securing new customers / contract orders; (ii) higher sales of pandemic related products; (iii) RM15m-40m revenue from distribution of Covid-19 vaccines in FY21-22E; and (iv) higher profit margins due to lower operating costs and better margins from the wholesale and distribution business. Broadly we forecast Apex’s core net profit to recover by 11% in 2021E before accelerating to 23% growth in 2022E on pent-up demand and contribution from new production lines.

Upgrade to HOLD With a Higher Price Target of RM3.80

We upgrade Apex to HOLD (from Sell) with a higher price target of RM3.80 based on 29x 2021E earnings (from 21.5x). We now peg Apex at 3 standard deviation above its 6-year average PER of 15x, taking into consideration: (i) the re-rating across the local pharmaceutical companies; (ii) strong investor appetite for Covid-19 vaccine related plays; and (iii) scarcity premium for pharmaceutical names with strong earnings track record. Key upside risks: strong investor appetite for Covid-19 vaccine plays, significant revenue uplift from distribution of Covid-19 vaccines; downside risk is lower-than-expected earnings

Source: Affin Hwang Research - 23 Nov 2020