FY17 reported PATAMI of RM53.8m (+17.9% YoY) which came in within expectations at 95%/98% of our/consensus full-year forecasts. We upgrade our TP from RM3.30 to RM3.85 based on 17x FY18E EPS (-0.5 SD below 5-year historical forward mean) to better reflect a more stable quarterly earnings ahead. Upgrade from UNDERPERFORM to MARKET PERFORM.

FY17 reported PATAMI of RM53.8m (+17.9% YoY) which came in within expectations at 95%/98% of our/consensus full-year forecasts. A fourth single-tier interim DPS of 6.0 sen was declared, which brings FY17 DPS to 19.0 sen which came in within our expectation.

Result Highlights. QoQ, 4Q17 revenue rose 6.7% due to increased orders from Government hospitals and improved contributions from the Group’s Indonesia operations. Correspondingly, 4Q17 PATAMI rose 17.9% to due to higher revenue in the manufacturing division with lower finance costs and compensation received in relation to a previous jointventure company in China.

YoY, FY17 Core PATAMI rose 18% to RM53.8m thanks to lower finance costs and compensation received in relation to a previous-joint venture company in China. However, this was offset by lower production at the manufacturing facilities on temporary closure of certain manufacturing production lines for preparatory works to facilitate the commercialisation of new products that were approved ahead of schedule. Correspondingly, the Manufacturing Division’s PBT fell 18% to RM75m due to lower production. The Indonesia division achieved a PBT of RM4m, a turnaround from the deficit of RM5m in FY16. This was mainly attributable to higher contribution because of a production rationalisation exercise as well as reduced finance cost.

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. The Indonesia operations remain a key area of growth, while further progress is being made 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 growth. 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.

Upgrade from UNDERPERFORM to MARKET PERFORM. We maintain our FY18E and FY19E earnings forecasts. We upgrade our TP from RM3.30 (previously -1.0 SD below 5-year historical forward mean) to RM3.85 based on 17x FY18E EPS (-0.5 SD below 5-year historical forward mean) to better reflect a more stable quarterly earnings ahead.

Key downside risk is the renewal of government concession, which is expected to expire in 2019. On the other hand, key upside risk to our call is the higher-than-expected margin and sales volume.

Source: Kenanga Research - 28 Feb 2018