1H17 reported PATAMI of RM28.4m (-14.8% YoY) which came in at 44%/47% of our/consensus full-year forecasts. Excluding the provision for inventories (RM3.2m), 1H17 core PATAMI of RM31.6m (-5% YoY) came in at 48% of our full-year forecast which is in line with our expectation. We are keeping our FY17 and FY18 earnings forecasts unchanged. Due to the volatile earnings outlook of the group, we cut our PER rating from 16.5x to 14.5x (-1.0 SD below 5-year historical forward mean). Correspondingly, our TP is cut from RM4.30 to RM3.80 based on 14.5x FY18E EPS. Reiterate Underperform.

Result Highlights. QoQ, 2Q17 revenue fell 16% due to lower off-take from government hospitals. 2Q17 CORE PBT fell 52% to RM27.8m (excluding the one-off provision for inventories of RM3.2m) due to lower revenue and temporary closure of certain manufacturing production lines for preparatory works to facilitate the commercialisation of new products that were approved ahead of schedule. Specifically, 2Q17 PBT at the manufacturing division was lower by 66% to RM8.2m. This brings 2Q17 CORE PATAMI to RM10.6m (stripping out one-off provision and write-off of inventories of RM1.1m) and cushioned by a lower effective tax rate of 4% compared to 31% ion 1Q17. A second single-tier interim DPS of 4.0 sen was declared, which brings 1H17 DPS to 8.0 sen which came in within our expectation. YoY, 1H17 CORE PATAMI fell 5% to RM31.6m (Excluding RM3.2m provision for inventories) no thanks to lower PBT of RM38m (-21%), primarily due to lower production at the manufacturing facilities temporary closure of certain manufacturing production lines for preparatory works to facilitate the commercialisation of new products that were approved ahead of schedule. The Indonesian division achieved a PBT of RM1.5m, a turn-around from the deficit of RM0.6m in 1H16. This was mainly attributable to higher contribution because of a production rationalisation exercise as well as reduced finance costs.

Outlook. Although earnings were impacted by the temporary closure of production lines, this will subsequently enable the Group to move forward with the commercialisation of new products as some of the products were approved ahead of schedule. We expect earnings to be lukewarm in subsequent quarters in anticipation of volatile off-take and potentially higher operating expenses. Additionally, the roll-out of PHIS is expected to continue to dampen bottom-line over the short-term. The Indonesian operations remain a key area of growth, while also making further progress in the European Union as the Group seeks to expand its global presence. In tandem with this, the Group is focused on implementing continuous cost optimisation measures across its operations. 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.

Reiterate UNDERPERFORM. We are keeping our FY17 and FY18 earnings forecasts unchanged. Due to the volatile earnings visibility of the group, we cut our PER rating from 16.5x to 14.5x (-1.0 SD below 5- year historical forward mean). Correspondingly, our TP is cut from RM4.30 to RM3.80 based on 14.5x FY18E EPS. Reiterate Underperform.

Source: Kenanga Research - 17 Aug 2017