• Despite an 11% qoq increase in revenue, Apex’s 1Q21 core profit fell by 18% to RM11.7m due to lower associate earnings and higher production, sales and marketing costs
• The results were below market and our expectations - 1Q21 core profit accounted for 20% of street and our full-year earnings forecasts. The miss was due to weak associate earnings and higher production costs
• We trim our 2021-23E EPS by 5-6% but raise our PT to RM2.88 (from RM2.80) after rolling forward our valuation horizon. Upgrade to HOLD following share-price weakness

Core Profit Fell by 18% Qoq Due to Lower Associate Earnings

Sequentially, Apex’s 1Q21 financial performance was mixed. Its revenue grew by an encouraging 11% qoq on recovery in sales to private-sector clinics and hospitals. The group has also delivered its first shipment of a contract manufactured cardiovascular drug to Australia and launched two new pharmaceutical products. However, higher production, sales & marketing costs limited its EBIT growth to +2.7%. A sharp decline in associate earnings to RM0.3m (from RM3.9m) led to the 18% qoq contraction in Apex’s 1Q21 core net profit to RM11.7m.

Lower Earnings Yoy Due to a Decline in Revenue; Below Expectations

On a yoy basis, Apex’s 1Q21 core net profit fell by 18% due to lower revenue (-7.2% yoy) and a decline in associate earnings. The decline in revenue was due to a high base in 1Q20 when pandemic-induced demand boosted sales of pandemic-related products and vitamins. Overall, the results were below market and our expectations. Apex’s 1Q21 core net profit of RM11.7m accounted for 20% of street and our full year earnings forecasts. The earnings miss was due to lower-than-expected associate earnings and higher production costs.

Trimming Earnings by 5-6% But Upgrading to HOLD on Price Weakness

We trim our 2021-23E EPS forecasts by 5-6% after incorporating lower associate earnings and higher production costs. Notwithstanding our earnings cuts, we raise our price target to RM2.88 (from RM2.80) after rolling forward our valuation horizon to 2022E, based on an unchanged 22x PER. We upgrade Apex to a HOLD (from Sell). After a 13.9% decline in its share price (qoq), Apex now trades at 22x 2022E PER, which looks fair to us. Upside risks: strong quarterly earnings, major contract manufacturing contract wins; downside risk is earnings disappointment.

Source: Affin Hwang Research - 20 May 2021