A temporary reprieve from a major U-turn. The Government has agreed to provide a 25-month interim period for procurement of drugs to Pharmaniaga Bhd after its concession ends on Nov 30, said Health Minister Datuk Seri Dr Dzulkefly Ahmad. The interim period from Dec 1 2019 to Dec 31 2021 was to ensure no supply chain disruption in the supply and distribution of medicines nationwide while an open tender and appointment of a new concessionaire is developed. This latest development came as a positive surprise which differs from what was mentioned previously and only provide a temporary reprieve to Pharmaniaga. Recall, on 31 Oct 2019, quoting TheEdgemarkets.com, Health Minister Datuk Seri Dr Dzulkefly Ahmad was quoted as saying that there would be no more concessions for logistics and distribution services for medical supplies.

Low margin logistical support was renewed for an additional 5years. However, starting from 1 Dec 2019, the Government will award Pharmaniaga a five-year contract for logistics and distribution of medicines based on its capabilities and performance. We highlight here that PBT margin for Logistics & Distribution segment is razor-thin averaging at 0.8% over the past 13 quarters. We believe the contract extension for logistical support lies in Pharmaniaga’s capability in the development of a procurement and logistical computerised system i.e. Pharmacy Information System (PHIS). PHIS play a vital and integral role in ensuring the distribution of drugs to patients and effective management of stock levels.

Looking for buyer for 56.1%-owned Pharmaniaga? Separately, according to the Edge Weekly, Boustead Holdings is looking to sell 56.1%-owned Pharmaniaga. We don’t expect the share price to rally considering Pharmaniaga’s cloudy earnings visibility beyond 2021. Recall, Boustead Holdings Berhad paid an estimated RM534m for 86.8% stake in Pharmaniaga (at RM5.75/share) in 2010. Based on current share price of RM2.21, the stock trades at 11x FY20E PER and 1x FY20E P/Book.

Reiterate Underperform. Due to the fluidity of the news and this latest development, we upgrade back our FY20E net profit by 40% taking into account an 20% increase in revenue. However, TP is raised marginally from RM1.60 to RM1.85 based on lowered 9x FY20E EPS (from previously 11.5x) which is -2.0SD below 5-year historical forward mean due to the cloudy earnings visibility beyond FY21. Reiterate Underperform.

Source: Kenanga Research - 11 Nov 2019