9M18 core PATAMI of RM52.5m (+28% YoY) came in within expectations at 76%/79% 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 RM2.90 based on 11x FY19E EPS (-1.5SD below 5-year historical forward mean).

9M18 core PATAMI of RM52.5m (+28% YoY) came in within expectations at 76%/79% of our/consensus full-year forecasts. A third interim DPS of 5.0 sen was declared, bringing 9M18 DPS to 14.0 sen, within our expectation.

Results highlights. QoQ, 3Q18 Core PATAMI rose 74%, excluding the provision for and write-off of: (i) receivables (RM1.4m) and (ii) inventories (RM2.2m); boosted by solid improvement in both the Logistics and Manufacturing divisions, lower operating expenses and boosted by a lower effective tax rate of 13% compare to 52% in 2Q18. The Logistics and Distribution Division recorded a pre-tax profit of RM3.7m compared to a loss of RM1.3m in 2Q18 due to lower operating expenses. Similarly, the manufacturing division’s pre-tax profit rose 10% to RM15.6m.

YoY, 9M18 revenue rose 5% due to increased orders from concession business and government hospitals. Correspondingly, 9M18 core PATAMI rose 28%, excluding the provision for and write-off of: (i) receivables (RM4m) and (ii) inventories (RM10.5m); thanks to better performance from the Logistics and Distribution division. The Logistics and Distribution division’s 9M18 PBT rose two-fold to RM12.4m mainly attributable to stronger contributions from concession business notwithstanding the impact from lower operating expenses. The Manufacturing Division posted a lower PBT of RM49.6m (-1.8% YoY) due to lower orders from the concession business.

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. TP is RM2.90 based on 11x 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. The saving grace is its 6.1% dividend yield.

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

Source: Kenanga Research - 21 Nov 2018