Period

2Q15/1H15

Actual vs. Expectations

1H15 PATAMI of RM48m (+13.8% YoY) came in within expectations at 49% and 45% of our and market consensus full-year forecast, respectively.

Dividends

A second interim single tier DPS of 7.0 sen was declared bringing 1H15 payout to 14.0 sen, which came in within our expectation. Key Result

Highlights

QoQ, 2Q15 revenue rose 8.7% due to contributions from the concession business as well as from its Indonesian operations. However, PBT declined 35% to RM25.2m largely due to an unfavourable product mix coupled with higher overheads, including finance costs and increased provision for stock obsolescence and short expiry products, specifically in the logistics and distribution division which registered a loss of RM1.3m. The Manufacturing Division recorded a PBT of RM26.3m (-5.3% QoQ). This was attributable to lower off-take for in-house products during 2Q15. This brings 2Q15 PATAMI to RM16.2m (-49% QoQ) dragged down by a higher effective tax rate. Note that we have highlighted in 1Q15 that 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%.

YoY, 1H15 net profit rose 13.8% to RM48m due largely to lower effective tax rate of 24% compared to 32% in 1H14. PBT rose slightly by 1.4% to RM63.7m due to margin improvement in the 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. However, this was negated by higher amortization of the Pharmacy Information System. There was also higher allocation of profit towards a talent development programme and on-going pre-clinical studies for the Group’s biotechnology herbal project, Kacip Fatimah.

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.

Change to Forecasts

No changes to our earnings forecasts.

Rating & Valuation

Upgrade to Outperform. Maintain our TP of RM6.95 based on unchanged 16.5x FY16 EPS. The share price of Pharmaniaga has retraced 25% from its high and is currently trading at an undemanding 13.5x FY16 EPS offering a decent dividend yield of 5%.

Risks to Our Call

Better-than-expected volume sales.

Source: Kenanga Research - 18 Aug 2015