1QFY20 core PATAMI of RM22.4m (+14% YoY; +46% QoQ) came in at 42%/47% of our/consensus forecasts. The variance from ours is due to higher-than-expected volume sales. We raise our FY20E/FY21E net profit by 27%/23% due to higher volume sales. Despite raising our net profit forecast, we are wary of its erratic quarterly earnings pattern. Moreover, earnings visibility after 31 Dec 2021 when the concession extension expires is cloudy. TP is raised from RM0.90 to RM1.35 based on 6x FY21E EPS but UP maintained.

1QFY20 core PATAMI of RM22.4m (+14% YoY, +46% QoQ) came in at 42%/47% of consensus forecasts. The variance from ours is due to higher-than-expected volume sales. A 1st interim dividend of 6.0 sen was announced and we raised our DPS from 6.0 sen to 10.0 sen.

Results’ highlights. QoQ, 1QFY20 top-line rose 15% due to stronger demand from government and private hospitals in Malaysia and Indonesia. The group registered a PBT of RM31m due largely to contribution from manufacturing compared to a pre-tax loss of RM238m (due to 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 in 4QFY19). Correspondingly, core PATAMI came in at RM22.4m (+46%).

YoY, 1QFY20 revenue rose 4% due to increased orders from concession and non-concession businesses and government hospitals. The Logistics and Distribution Division PBT rose 83%, driven by stronger contributions from government hospitals as well as lower operating costs which more than offset lower Manufacturing (-53%). This brings core PATAMI higher by 14%.

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 ends on 30th Nov 2019. The interim period from 1st Dec 2019 to 31st Dec 2021 is 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 has awarded 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 0.2% over the past 20 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.

Upgrade our FY20E/FY21E net profit by 27%/23% due to higher than-expected volume sales.

Maintain UP. Correspondingly, our TP is raised form RM0.90 to RM1.35 based on 6x FY21E EPS which is -2.0SD below 5-year historical forward mean due to the cloudy earnings visibility beyond FY21. Reiterate Underperform.

Key risk is higher-than-expected volume sales.

Source: Kenanga Research - 20 May 2020