FY18 core PATAMI of RM57.4m (+3.6% YoY) came in below expectations at 84%/89% of our/consensus full-year forecasts. The negative variance from our forecast was due to lower-than-expected volumes sales, which prompted us downgrade our FY19E/FY20E forecasts by 18%/22%. TP is cut from RM2.90 to RM2.50 based on an unchanged 11.5x FY19E EPS (-1.5SD below 5-year historical forward mean). Reiterate MP

FY18 core PATAMI of RM57.4m (+3.6% YoY) came in below expectations at 84%/89% of our/consensus full-year forecasts. The negative variance from our forecast was due to lower-thanexpected volumes sales. A fourth interim DPS of 2.0 sen was declared, bringing 12M18 DPS to 16.0 sen, below our expectations. As such we cut our FY19E/FY20E DPS to 14.0 sen from 19.0 sen.

Results’ highlights. QoQ, 4Q18 Core PATAMI fell 72%, excluding the provision for, and write-back and write-off of: (i) receivables (RM6.1m) and (ii) inventories (RM6.6m), respectively, in 4QFY18 and provision for write-off of: (i) receivables (RM1.4m) and (ii) inventories (RM2.2m) in 3QFY18; dragged down by losses at the Logistics and Manufacturing divisions, and exacerbated by a higher effective tax rate of 62% compared to 13% in 3Q18. The Logistics and Distribution Division recorded a pre-tax loss of RM0.4m compared to a pre-tax profit of RM3.7m in 3Q18 due to higher operating expenses, including selling and distribution. Similarly, the manufacturing division’s pre-tax profit fell 29% to RM11m.

YoY, FY18 revenue rose 3% due to increased orders from concession business and government hospitals. Correspondingly, FY18 core PATAMI rose 3.6%, excluding the provision for writeback and write-off of: (i) receivables (RM2.1m) and (ii) inventories (RM17.1m) in FY18 and excluding one-off gains from of RM8m as compensation received in relation to a previously owned JV in China and provisions for receivables and inventories (RM9.5m) in FY17; thanks to better performance from the Logistics and Distribution division and more than offset lower contribution from manufacturing. The Logistics and Distribution division’s FY18 PBT rose two-fold to RM12m attributable to stronger contributions from Government and concession businesses notwithstanding the impact from lower operating expenses. The Manufacturing Division posted a lower PBT, by 19%, 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 already in place for the distributions of such medical supplies. Overseas, the Indonesian operation remains a key area of growth, while further progress is being made in the European Union as the Group seeks to expand its global presence. 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.

Downgrade FY19E/FY20E net profit by 18%/22% to take into account the lower-than-expected sales.

Maintain MP. TP is cut from RM2.90 to RM2.50 based on an unchanged 11.5x FY19E EPS (-1.5SD below 5-year historical forward mean). Key downside risk is the uncertainty regarding the renewal of the government concession which is expected to expire in 2019.

Source: Kenanga Research - 22 Feb 2019