1H16 PATAMI of RM33.4m (-31% YoY) came in at 39% and 40% of our and market consensus full-year forecasts. The negative variance was due to higher-than-expected operating expenses and amortisation of the Pharmacy Information System (PHIS) system. Hence, we downgrade our FY16E and FY17E net profits by 5% to take into account the higher-than-expected expenses and amortisation of the PHIS system. Correspondingly, our target price is reduced from RM5.85 to RM5.57 based on unchanged 16.5x FY17E revised EPS. Maintain MARKET PERFORM.

1H16 PATAMI of RM33.4m (-31% YoY) came in at 39% and 40% of our and market consensus full-year forecasts, respectively. The negative variance was due to higher-than-expected operating expenses and amortisation of the Pharmacy Information System (PHIS) system. A second single-tier interim DPS of 5.0 sen was declared, bringing 1H16 DPS to 9.0 sen which is within our expectation.

Result Highlights. QoQ, 2Q16 revenue fell 5% to RM531.8m driven by lower demand from Government hospitals under the concession operations. Correspondingly, PBT fell 19% to RM21.5m due to higher operating costs from promotional activities further exacerbated by higher amortization of the PHIS system. This brings 2Q16 PATAMI to RM15m (-18% QoQ) but buffeted by a lower effective tax rate of 27% compared to 30% in 1Q16. This quarter marked the third consecutive quarterly earnings disappointment.

YoY, 1H16 Topline rose +11% mainly due to the group’s Indonesian operations. However, 1H16 PATAMI fell 31% no thanks to i) higher expenses from promotional activities and research and development; ii) higher amortisation of the PHIS system; and iii) higher effective tax rate of 29% compared to 24% in 1H15. Overall profitability was mainly dragged down by the logistics and distribution division which recorded a loss before tax of RM4.7m compared to a PBT of RM9.5m due to higher expenses and amortisation as mentioned above. This brings overall 1H16 PBT margin to 4% compared to 6% in 1H15.

Outlook. We expect earnings to be lukewarm in 2H16 as well in anticipation of the slower-than-expected general economic growth. Additionally, the roll-out of the PHIS system is expected to continue to dampen Pharmaniaga’s bottom line over the short-term. Over the longer-term, we expect Pharmaniaga's manufacturing division to propel its earnings. The group aims to add about 200 new products over the next 10 years to its existing portfolio of around 500 products. This should boost demand for its products and lift earnings. Downgrade our FY16E and FY17E net profit. We downgrade our FY16E and FY17E net profit estimates by 5% to take into account the higher-than-expected operating cost and amortisation of the PHIS system.

Maintain Market Perform. Correspondingly, we cut our TP from RM5.85 to RM5.57 based on unchanged 16.5x FY17E revised EPS.

Source: Kenanga Research - 22 Aug 2016