Period

4Q15/1FY15

FY15 PATAMI of RM84m (-10% YoY) came in 18% and 23% below our and market consensus full-year forecast, respectively. The negative variance from our results was due to higher-than-expected promotional expenses and amortisation of the Pharmacy Information System (PHIS) system.

Dividends

A third interim single tier DPS of 7.0 sen was declared, bringing 12M15 payout to 27.0 sen, which is below our full-year forecast of 29.9 sen.

QoQ, 4Q15 revenue rose 29% due to higher orders from Government hospitals under the concession and non-concession businesses. However, PBT fell 6.4% to RM23.7m due to amortization of PHIS and transportation costs, higher-than-expected overhead expenses such as marketing and promotion costs. This brings 4Q15 PATAMI to RM16m (-19.8% QoQ) exacerbated by a higher effective tax rate of 32% compared to 21% in 3Q15. 

YoY, FY15 net profit fell 10% to RM84m despite a flattish turnover primarily attributable to reduced Government orders and amortisation for the PHIS and increased promotional activities but mitigated by lower manufacturing costs arising from ongoing cost optimisation and efficiency measures across the Group’s manufacturing plants.

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 

We downgrade our FY16E net profit by 8% to take into account the higher-than-expected operating cost and amortisation of the PHIS system.

Rating & Valuation

Downgrade to Market Perform as we cut our TP is from RM6.95 to RM6.40 based on unchanged 16.5x FY16E EPS. The stock has risen by >50% since our initiating coverage report back in Nov 2014 coupled with lack near-term catalyst, we downgrade the stock from Outperform to Market Perform.

Risks

Lower-than-expected volume sales.