• Notwithstanding a weaker 4Q20 revenue of RM162m (lowest since 1Q17), Apex’s 4Q20 core net profit grew by 3% yoy (+1% qoq) on lower operating costs and higher associate earnings
• 2020 core net profit of RM55m (+5.7% yoy) was within our expectation
• We cut our 2021-22E earnings forecasts by 3-14% after incorporating a less bullish revenue growth trajectory. Separately, we lowered our target PER to 22x (from 29x) in anticipation of a gradual shift in investor focus to recovery plays / undervalued companies. Downgrade Apex to SELL.

Earnings were in line – lower operating costs and higher associate earnings cushioned revenue disappointment

Notwithstanding a weaker 4Q20 revenue of RM161.6m (-5.3% yoy / -4.5% qoq), Apex’s 4Q20 core net profit grew by 3% yoy / 1.4% qoq to RM14.3m on lower operating costs and higher associate earnings. Apex’s 2020 core net profit of RM55.3m (+5.7% yoy) was within market and our expectations. The group declared a higher final dividend of 2.8 sen per share (vs 2.0 sen in 2019), translating to fullyear dividend of 4.5 sen per share (2019: 3.7 sen).

4Q20 Manufacturing Revenue of RM30.8m Was Lowest Since 1Q17

The recovery in Apex’s Malaysia businesses continued to be slow due to subdued demand from the private, government and export sectors. Notably, the group’s 4Q20 manufacturing & marketing revenue of RM30.8m (-7.8% qoq / -31.6% yoy) was its lowest since 1Q17. Looking ahead, we expect the launch of new generic pharmaceutical products and higher contract manufacturing activities to drive a recovery in manufacturing revenue, but likely to fall short of our prior expectations.

Cutting 2021-22E Earnings Forecasts by 3-14%, Downgrade to SELL

We cut our 2021E and 2022E earnings forecasts by 3% and 14% respectively after incorporating a weaker revenue growth trajectory. While we expect Apex to generate additional revenue from the distribution of the Covid-19 vaccine, the contribution may be minor at 2-4% of Apex’s revenue. Separately, we have lowered our valuation multiple to 22x 2021E PER based on 1 standard deviation above its 6-year average PER of 15x (from 29x) as we expect investors to shift their focus to economic recovery plays and undervalued companies. All in all, we downgrade APEX to SELL with a lower price target of RM2.80 (from RM3.80). Key risks to our call are: (i) higherthan-expected earnings; and (ii) the securing of major new contract manufacturing jobs.

Source: Affin Hwang Research - 26 Feb 2021