1H18 core PATAMI of RM33.9m (+5.8% YoY) came in within expectations at 50%/51% of our/consensus full-year forecasts. The stock has been de-rated on concerns of Government reviewing all medical supplies concession agreements of which Pharmaniaga has a 10-year contract ending in November 2019. We maintain our MP rating and TP of RM3.05 based on 11.5x FY19E EPS (-1.5SD below 5- year historical forward mean).

1H18 core PATAMI of RM33.9m (+5.8% YoY), excluding the provision for and write-off of receivables (RM2.6m) and inventories (RM8.3m), came in within expectations at 50%/51% of our/consensus full-year forecasts. A second interim DPS of 4.0 sen was declared, bringing 1H18 DPS to 9.0 sen which came in within our expectation.

Result highlights. QoQ, 1Q18 Core PATAMI fell 54%, excluding the provision for and write-off of receivables (RM1.6m) and inventories (RM3.7m) dragged down by lower revenue (-16%) as a result of lower orders from government hospitals under the concession business. As a result of this, coupled with higher operating expenses, the Group posted a PBT of RM12m compared with RM29m in 1Q18.

YoY, 1H18 revenue rose 6% due to increased orders from concession business and from government hospitals. Correspondingly, 1H18 core PATAMI rose 5.8% thanks to better performance from the Logistics and Distribution division. The Logistics and Distribution Division’s 1H18 PBT rose two-fold to RM9m mainly attributable to stronger contributions from concession business notwithstanding the impact from increased operating expenses. The Manufacturing Division posted a PBT of RM34m (-0.7% YoY) due to lower orders under the concession business. Meanwhile, the Indonesia Division's PBT was flat at RM1m mainly due to the depreciation of the Malaysian Ringgit against the Indonesian Rupiah and increased finance costs.

Outlook. The stock has been de-rated on concerns of Government reviewing all medical supplies concession agreements of which Pharmaniaga has a 10-year contract ending in November 2019. We are unsure of the renewability of the contract but Pharmaniaga has the track record, platform and systems in place for the distributions of medical supplies. The Indonesian 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, which should boost demand for its products and lift earnings.

Maintain MP. We maintain our MP rating and TP of RM3.05 based on 11.5x FY19E EPS (-1.5SD below 5-year historical forward mean). The de-rating reflects a concern of investors over the review of Government on all medical supply concession agreements, of which Pharmaniaga has a 10-year contract ending in November 2019.

Key downside risk is the uncertainty regarding the renewal of government concession, which is expected to expire in 2019.

Source: Kenanga Research - 20 Aug 2018