12M16 PATAMI of RM45.6m (-46% YoY) came in below expectations at 65% and 69% of our and market consensus full-year forecasts, respectively. The negative variance was due to losses suffered in 4Q16 as a result of higher-thanexpected operating expenses and lower-than-expected volume sales. Hence, we downgrade both our FY17E and FY18E net profits by 15%-22% to take into account the higher-than-expected operating expenses. Correspondingly, our target price is reduced from RM4.92 to RM4.20 based on an unchanged 16.5x FY17E revised EPS. Reiterate UNDERPERFROM.

Result Highlights. QoQ, 4Q16 revenue rose 13% due to higher demand from government hospitals and higher manufacturing contribution (+36%). However, PBT collapsed 80% to RM4m due to losses in the Logistics and Distribution division as a result of higher finance costs. Correspondingly, 4Q16 register a loss of RM0.8m compared to a PATAMI of RM13.1m in 3Q16. This quarter marked the fifth consecutive quarterly earnings disappointment. A fourth singletier interim DPS of 3.0 sen was declared, bringing 12M16 DPS to 16.0 sen which is within our expectation.

YoY, 12M16 PATAMI fell 46% no thanks to: (i) higher expenses from promotional activities and research and development, (ii) the Logistics and Distribution division which recorded a loss before tax of RM14.8m due to higher finance costs, selling and distribution expenses, and (iii) lower offtake for in-house products under the concession business. This dragged 12M16 PBT margin to 3% compared to 5% in 12M15.

Outlook. We expect earnings to be lukewarm in subsequent quarters as well in anticipation of the slower-than-expected general economic growth. Additionally, the roll-out of PHIS is expected to continue to dampen bottom-line over the short-term. Over the longer-term, we expect its manufacturing division to propel 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 FY17E and FY18E net profits. We downgrade both our FY17E and FY18E net profits estimates by 15% and 22%, respectively to take into account the higher-than-expected operating cost and lower-than-expected volume sales.

Reiterate UNDERPERFORM. Correspondingly, we cut our TP from RM4.92 to RM4.20 based on an unchanged 16.5x and the revised FY17E EPS.

Source: Kenanga Research - 22 Feb 2017