1Q16 PATAMI of RM18.4m (-42% YoY) came in at 18% of our and market consensus full-year forecasts. The negative variance on our side was due to higher-thanexpected operating expenses and amortisation of the Pharmacy Information System (PHIS) system. We downgrade our FY17E and FY18E net profits by 12-15% to take into account the higher-than-expected expenses and amortisation of the PHIS system. Correspondingly, our target price is reduced from RM6.40 to RM5.85 based on 16.5x FY17E EPS.

Maintain Market Perform. 1Q16 PATAMI of RM84m (-10% YoY) came in at 18% of our and market consensus full-year forecasts. A first single-tier interim DPS of 4.0 sen was declared, which is below our expectation. We cut our DPS from 27.0 sen to 20.3 sen and 21.9 sen for FY16 and FY17, respectively.

Result Highlights. YoY, 1Q16 revenue rose 18.5% to RM471.9m driven by higher demand from Government hospitals under the concession and non-concession businesses. However, PBT fell 31% to RM26.5m due to higher operating costs, including selling and distribution costs, amortization of PHIS and transportation costs and higher finance costs. This brings 1Q16 PATAMI to RM18.4m (-42% YoY) exacerbated by a higher effective tax rate of 30% compared to 17% in 1Q15.

QoQ, 1Q16 net profit rose 15% despite a lower turnover (-18% QoQ) as a result of moderate orders from hospitals but was more than offset by reduced expenses for promotional activities and research and development.

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.

Downgrade our FY16 and FY17 net profit. We downgrade our FY16E/FY17E net profit estimates by 15%/12% to take into account the higher-than-expected operating cost and amortisation of the PHIS system.

Maintain Market Perform. Correspondingly, we cut our TP is from RM6.40 to RM5.85 based on unchanged 16.5x FY17E EPS. Note that we roll forward our valuation from FY16 to FY17. 

Source: Kenanga Research - 16 May 2016