Period  4Q14/FY14

Actual vs. Expectations  FY14 PATAMI of RM93.8m (+70% YoY) beat our and market consensus full-year forecast by 20% and 12%, respectively. However the PBT came in within our expectation while the variance from our net profit estimate was largely due to an unexpectedly low effective tax rate of 25% as compared to our assumption of 39%.

Dividends  A fourth interim single tier DPS of 12.0 sen was declared, which will be going ex-div on 9 Mar 2015. This brings its FY14 total dividend to 28.0 sen which is above our expectation.

Key Result Highlights  QoQ, 4Q14 revenue rose 25% due to higher off-take from government hospitals. Specifically, growth driver came from the Logistics and Distribution Division which posted its strongest quarter performance in 2014 with a PBT of RM18.9m, more than a three-fold increase from RM4.9m in 3Q14. Correspondingly, 4Q14 PATAMI rose >100% to RM36.7m which was further boosted by a low effective tax rate of 3% compared to 40% in 3Q14.

 YoY, 9M14 net profit rose 70% to RM93.8m 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. 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 better-than-expected results, we upgrade our FY15E and FY16E net profits by 3-8% imputing a lower effective tax rate and higher volume sales.

Rating & Valuation  Correspondingly, our target price is raised by 8% from RM5.03 to RM5.43 based on unchanged 14.5x FY15E revised EPS, at a 15% premium to its peers’ average due to its bigger market capitalisation

 Maintain OUTPERFORM. The stock has risen by 13% since our initiating coverage report back in Nov 2014. We continue to like Pharmaniaga for: (i) its defensive earnings being a prime beneficiary as the sole concession holder to purchase, store, supply 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 >5%.

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

Source: Kenanga