Period

1Q15

Actual vs. Expectations

1Q15 PATAMI of RM31.8m (+21% YoY) came in at 32% and 31% of our and market consensus full-year forecast, respectively. We consider the results to be within expectations because subsequent quarters earnings growth rates are expected to taper off as the recognition of deferred tax assets for some of the subsidiaries are expected to be fully utilised. We estimate the sustainable effective tax rate to be between 28% and 33%.

Dividends

A first interim single tier DPS of 7.0 sen was declared, which came in within our expectation. Key Result

Highlights

QoQ, 1Q15 revenue fell 24% due to lower off-take from government hospitals. However, PBT rose slightly mainly due to improved manufacturing margin contributions that offset the lower revenue. Manufacturing PBT margin interestingly rose to 33% in 1Q15 compared to 17% in 4Q14 as a result of efficiency improvement. 1Q15 PATAMI fell 13% to RM31.8m due to lower effective tax rate of 17% compared to 3% in 4Q14. Note that the lower effective tax rate was due to recognition of deferred tax assets for some of the subsidiaries but it was expected to be fully utilised. Hence, we expect the effective tax rate to elevate back to between 28% and 33%.

YoY, 1Q15 net profit rose 21% to RM31.8m due largely to lower effective tax rate of 17% compared to 30% in 1Q14. PBT rose slightly by 1.3% due to margin improvement in the manufacturing division. PBT margin rose to 33% in 1Q15 from 26% in 1Q14. This was primarily attributable to the higher profit margin from manufacturing division as a result of improved operational efficiencies, which directly reduced its manufacturing costs. Some of the efficiency improvement initiatives were manufacturing batch consolidation and enhanced procurement exercise.

Outlook

Pharmaniaga is a prime beneficiary of 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

No changes to our earnings forecasts.

Rating & Valuation

Downgrade to MARKET PERFORM from OUTPERFORM. The stock has risen by >50% since our initiating coverage report back in Nov 2014. Due to the strong share price performance and rich FY15 and FY16 PER valuations of 17.9x compared to an average net profit growth of 7.9%, coupled with lack near-term catalyst, we downgrade the stock from Outperform to Market Perform. The saving grace is a decent dividend yield of 4.3%. Our RM6.95 target price is based on unchanged 16.5x FY16 EPS.

Risks to Our Call

Better-than-expected volume sales.

Source: Kenanga Research - 19 May 2015