FY19 core PATAMI of RM44.8m (+5% YoY) came in at 80% of our but at 112% of consensus forecasts. The variance from ours is due to lower-than-expected volume sales. However, we keep our FY20E earnings unchanged. The headline loss in 4QFY19 was due to PHARMA fulfilling its contractual obligations whereby the remaining unamortised costs in PHIS were amortised under the concession agreement. However, earnings visibility is cloudy beyond this interim period. TP is RM1.85. Reiterate UP.

FY19 core PATAMI of RM44.8m (-10% YoY) came in at 80% of our but at 112% of consensus forecasts. The variance from ours is due to lower-than-expected volume sales. No dividend was declared in this quarter which was unexpected bringing FY19 DPS to 6.0 sen.

Results’ highlights. QoQ, 4QFY19 top-line fell marginally by 0.2% due to flat overall demand from both concession and non-concession businesses in Malaysia and Indonesia. Nevertheless, the group registered a pre-tax loss of RM238m compared to a pre-tax profit of RM11.9m in 4QFY18 due to expensing a one-off RM247m revision in useful life of the rights to supply and provision of stock write off as a result of the voluntary Ranitidine product recall. However, headline Core PATAMI came in at RM15.4m (>+100% from low base in 3QFY19). The rights to supply are expenses incurred for Pharmacy Information System (PhIS) in providing and supplying to the Government certain hardware and software, being part and parcel of the contractual obligations under the concession agreement.

YoY, FY19 revenue rose 18% due to increased orders from concession and non-concession businesses and government hospitals. Nevertheless, FY19 register a headline loss of RM149m due to due to expensing a one-off RM247m revision in useful life of the rights to supply (concession) and provision of stock write off as a result of the voluntary Ranitidine product recall. However, core PATAMI rose 5% to RM44.8m thanks to better contribution from logistics and distribution.

Outlook. With the new contract arrangement as explained, the remaining unamortised rights to supply have been fully recognised. The Government has agreed to provide a 25-month interim period for procurement of drugs to Pharmaniaga Bhd after its concession ended 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 if it wins the open tender to retain the concession on satisfactory terms earlier than expected.

Source: Kenanga Research - 21 Feb 2020