We came away from Pharmaniaga’s company visit feeling positive about its prospects going forward. The key take-aways include: (i) Indonesian unit PT ERRITA expected to turn around in FY15, (ii) recent supply agreement with three teaching hospitals to boost revenue, and (iii) PHIS system is only expected to be implemented nationwide somewhere in FY15 and FY16. We maintain OUTPERFORM call on the stock with a higher TP of RM6.95 to reflect our higher revised earnings forecast and PE target of 16.5x compared to 14.5x previously, and rolling forward our valuation from FY15E to FY16E. Although Pharmaniaga’s share prices have been performing well since our initiating coverage back in Nov 2014, rising 36%, we believe that the stock has further upside.
New supply agreement with three teaching hospitals could raise revenue. Recall, Pharmaniaga has over the past few months signed exclusive agreements to solely undertake the services of purchasing, storing, supplying and delivering drugs and non-drugs to three teaching hospitals namely Hospital University Sains Malaysia, Hospital University Kebangsaan Malaysia and Hospital University of Malaya. All three agreement concessions will end in Nov 2019. We expect the three teaching hospitals to contribute RM160m per annum or 7% to Pharmaniaga’s topline. We expect topline contribution to double from the low base of which we have yet to factor into our earnings model. However, gross profit margins are expected to be lower by 2-3ppts compared to the Government hospitals' concession. We are not overly concerned as the higher volume would make up for the lower margins.
Pharmacy Information Systems (PHIS) to only be fully implemented nationwide somewhere in FY15 and FY16. We understand that the PHIS system is only expected to be rolled out nationwide somewhere between 2015 and 2016. As such, we believe the higher cost from the PHIS implementation is expected to hit Pharmaniaga in end FY15 or starting from FY16. However, the slack from lower margin in the logistics & distribution division (PHIS system cost incurred in this division) will be more than taken up by the manufacturing division. We have sufficiently factored in this cost into ourearnings model. PHIS plays a vital and integral role in ensuring the dispensing of drugs to patients and management of stock levels under the concession agreement.
Indonesia unit PT Errita Pharma expected to turn around in FY15. Pharmaniaga’ 75%-owned Indonesian manufacturing based PT Errita Pharma, which suffered a loss in RM2.9m in FY14 is expectedto turn around in FY15. The reasons are: (i) the low utilisation rate of 50-60%in FY14 was due to delay in the registration of ten new products, which was rectified and approved in end 2014, and (ii) absence of kitchen sinking or provision made in FY14.
Separation of drugs prescription and dispensing could pose risk to earnings? Speculation is rife that the Health Ministry may soon prohibit doctors from dispensing drugs to their patients and hence diminish their roles to only prescribing. It was also reported in the media that organisations representing doctors and pharmacists have agreed, in principle, that dispensing be left to the pharmacists. Pharmaceutical players are unlikely tobe affected since they still be supplying to the dispensers (whoever they may be) and consumption of drugs are essential for healthcare reasons. Specifically, revenue generated by Pharmaniaga (under our coverage) is supported by government concessions, non-government purchasers and exports to a smaller extent.
Raising our FY15E and FY16E net profit by 2-3% Overall, we are raising our FY15E and FY16E net profits by 2-3% as we assume higher revenue contribution from the new supply agreements with the teaching hospitals. Correspondingly, we raised our TP from RM5.45 to RM6.95. Apart from thehigher earnings forecasts, the upgrade in our TP also reflects a higher 1-yearforward PER rating of 14.5x to 16.5x and rollover in valuation from FY15E to FY16E.
Maintain OUTPERFORM. 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%.
Source: Kenanga Research - 24 Mar 2015
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