9MFY19 core PATAMI of RM41.4m (+8% YoY) came in at 75%/83% of our/consensus full-year forecasts. On its supply concession which ends on 30 Nov 2019, Pharmaniaga has been given a reprieve by the government for a 25-month interim period from 1st Dec 2019 to 31st Dec 2021. However, the earnings visibility is cloudy beyond this interim period. TP is RM1.85 based on 9x FY20E EPS. Reiterate UP.

9MFY19 core PATAMI of RM41.4m (+8% YoY) came in at 75%/83% of our/consensus full-year forecasts. No dividend was declared as expected.

Results’ highlights. QoQ, 3QFY19 top-line rose 19% to RM716.8m due to higher overall demand from both concession and nonconcession businesses in Malaysia and Indonesia with both Logistics & Distribution and Manufacturing division revenues rising 27% and 15%, respectively. Nevertheless, pre-tax profit was lower by 70% due to oneoff non-recurring expenses. Correspondingly, headline PATAMI came in at RM0.5m (<100%). Excluding the one-off non-recurring expenses, 3QFY19 core PATAMI is at RM12.5m (+34%). We guesstimate the one-off non-recurring expenses at RM12m.

YoY, 9MFY19 revenue rose 18% due to increased orders from concession and non-concession businesses and government hospitals. Nevertheless, headline 9MFY19 PATAMI fell 23%, no thanks to lower performance from manufacturing division which was offset by better contribution from Logistics and Distribution. The Logistics and Distribution division’s PBT rose 41% YoY due to better contribution from non-concession businesses with higher revenue (+18%) despite higher operating expenses. Excluding the one-off non-recurring expenses, 9MFY19 core PATAMI came in at RM41.1m (+8%). We guesstimate the one-off non-recurring expenses at RM12m.

Outlook. The Government has agreed to provide a 25-month interim period for procurement of drugs to Pharmaniaga Bhd after its concession ends on 30th Nov 2019. The interim period from 1st Dec 2019 to 31st Dec 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. However, starting from 1st Dec 2019, the government will award Pharmaniaga a five-year contract extension 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.

Maintain UP. We maintain our FY19E/FY20E earnings. TP is RM1.85 based on 9x FY20E EPS which is -2.0SD below 5-year historical forward mean due to the cloudy earnings visibility beyond FY21. Reiterate Underperform.

Key risk is the uncertainty regarding the renewal of the government concession which is expected to expire this month.

Source: Kenanga Research - 21 Nov 2019