1Q19 core PATAMI of RM19.6m (+11.5% YoY) came in at 33% of both our and consensus full-year forecasts. We consider the results to be within our expectation due to the past volatility in quarterly earnings trend while historically 2H is weaker than 1H. Due to the uncertainty surrounding the renewal of its concession, we cut our TP from RM2.50 to RM2.35 based on 11x FY20E EPS (-1.5SD below 5-year historical forward mean). Reiterate MP.

1Q19 core PATAMI of RM19.6m (+11.5% YoY) came in at 33% of both our and consensus full-year forecasts. We consider the results to be within our expectation due to the past volatility in quarterly earnings and historically 2H is weaker than 1H. A first interim DPS of 6.0 sen was declared, which is within our expectation.

Results’ highlights. QoQ, 1Q19 PATAMI rose >100% due to higher revenue (+31.8%) underpinned by erratic stronger demand from government and private hospitals in Malaysia and Indonesia. The star performer was Logistics and Distribution Division, which recorded a pretax profit of RM12.6m compared to a pre-tax loss of RM0.4m in 4Q18 due to higher revenue (+41.9%). Similarly, the manufacturing division’s pre-tax profit rose 72.5%. 1Q19 PATAMI is further boosted by an erratic lower effective tax rate of 35% compared to 62% in 4Q18.

YoY, 1Q19 revenue rose 27.2% due to increased orders from concession business and government hospitals. Correspondingly, 1Q19 PATAMI rose 11.5% thanks to better performance from the Logistics and Distribution division which more than offset lower contribution from manufacturing. The Logistics and Distribution division’s PBT rose 27.4% YoY attributable to stronger contributions from government and concession businesses with higher revenue (+26.9%) despite higher marketing and promotional expenses. The Manufacturing Division posted a weaker PBT by 3.7%, due to lower orders from the concession business. The Indonesia unit marked a turnaround, registering a PBT of RM0.4m, an improvement compared to a loss of RM0.4m in 1Q18. This was mainly attributable to increased demand from government and private hospitals as well as ongoing cost optimisation measures.

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, its 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.

Maintain MP. We roll forward our valuation base from FY19E to FY20E. Due to the uncertainty surrounding the renewal of its government concession, we cut our TP from RM2.50 to RM2.35 based on 11x FY20E EPS (from 11.5x previously) (-1.5SD below 5-year historical forward mean). Reiterate MP.

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

Source: Kenanga Research - 17 May 2019