We are initiating coverage on Pharmaniaga with a OUTPERFORM recommendation and TP of RM5.35 based on 14.5x FY15 EPS, which is at 15% premium to its peers’ average due to its bigger market capitalisation. Pharmaniaga is a GLC-linked company with the sole concession holder to purchase, store, supply and distribute approved drugs and medical products to 148 government hospitals and 1,400 clinics and district offices nationwide. We like Pharmaniaga because of: (i) its defensive earnings being a prime beneficiary being the sole concession holder to purchase, store, supplies and distribute approved drugs and medical products to Government hospitals and clinics nationwide, (ii) its growth exposure in the healthcare and pharmaceuticals industry supported by an ageing population, and (iii) decent dividend yield of 4.8%.

Concession agreement is the jewel in the crown. Pharmaniaga is a prime beneficiary being the sole concession holder to purchase, store, supply and distribute approved drugs and medical products to 148 government hospitals and 1,400 clinics and district offices nationwide. The concession agreement ends in 2019 and allows for an upward revision in prices every three years. The last revision was back in 2011. Note that Pharmaniaga Logistics had on 16 Mar 2012 entered into a 10-year concession agreement with the Malaysian government to purchase, store, supply and distribute drugs and medical products.

An ETP play. The stage is set for explosive growth in the pharmaceuticals sector which under the Economic Transformation Programme is expected to achieve a 22% growth rate that will deliver RM16.6bn GNI by 2020, driven by higher exports of generic pharmaceuticals and enhanced generics. The catalyst is expected to come from significant extra capacity in the domestic pharmaceuticals industry which can be re-focused on higher value-added manufacturing. In Malaysia, over the past decade, the pharmaceutical sector has steadily grown at an annual rate of 8% to 10%. On the back of this robust demand, there still lies much untapped potential for the Group. As a testament to this, development of the pharmaceutical industry was identified as one of the Entry Point Projects under the Government’s Economic Transformation Programme.

Growth in healthcare indirectly supported by ageing population. It is estimated that during the period of 2010-2040, Malaysia's population aged 65 and over is projected to increase more than three folds of the 2010 population. The increase will cause Malaysia to become an aging population in 2021 when the population aged 65 years and over reach 7.1%. This improvement has been attributed mainly to advances in medical technology, higher personal wealth and growing awareness of the importance of healthcare and disease prevention. As the general population lives longer, a consequence would be an increase in the number of those diagnosed with age-related disorders such as high blood pressure, Alzheimer’s disease and heart conditions that require intensive care, and more advanced and long-term treatment.

New products and SVI to spur growth in manufacturing. Over the longer-term, we expect Pharmaniaga's manufacturing division to propel its earnings. The group aims to add about 200 new products over the next 10 years to its existing portfolio of around 500 products. This should boost demand for its products and lift earnings. Additionally, its small volume injectables (SVI) will benefit from the expiration of patents of well-known drugs or better known as "patent cliff". Technically, the patent cliff will allow generic drug makers such as Pharmaniaga to enter once-protected segments of the pharmaceutical market via the introduction of generic versions of the patented drugs.

Source: Kenanga