Period  3Q14/9M14

Actual vs. Expectations  9M14 PATAMI of RM57m (+66% YoY) came in below expectations; at 67% of both consensus and our full-year net profit forecasts. The negative variance is due to lower-than-expected off-take for in-house products from government hospitals as well as higher operating expenses, including research and development expenditure.

Dividends  A third interim single tier DPS of 8 sen was declared, which will be going ex-div on 5 Dec 2014. This brings its 9M14 total dividends to 16 sen which is inline with our expectation.

Key Result Highlights QoQ, 3Q14 revenue fell 4.4% due to lower off-take from government hospitals. However, PBT rose 1.2% to RM24.9m thanks to a >2 fold increase in the Logistics and Distribution division underpinned by an average 2-3% increase in average selling prices as well as higher volume sales which more than offset lower-than-expected off-take for in-house products from government hospitals as well as higher operating expenses, including research and development expenditure. As a result, manufacturing division PBT margin fell by 4.7%bps from 29.9% in 2Q14 to 25.2% in 3Q14.

 YoY, 9M14 net profit rose 66% to RM57.1m due to the absence of amortisation charges from the novation agreement to supply pharmaceutical products, higher volume sales emanating from growing healthcare spending in Malaysia and better economies of scale.

Outlook  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 upwards 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.

Change to Forecasts Due to the lower-than-expected results, we downgrade our FY14 and FY16 net profit forecasts by7-10%.

Rating & Valuation Correspondingly, our target price is reduced by 6% from RM5.35 to RM5.03 based on unchanged 14.5x FY15E EPS, at a 15% premium to its peers’ average due to its bigger market capitalisation

 Maintain OUTPERFORM. We like Pharmaniaga for:

(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%.

Risks to Our Call  Lower-than-expected volume sales.

Source: Kenanga