1HFY20 core PATAMI of RM32m (+12% YoY) came in within expectations at 47%/50% of our/consensus forecasts. Pharmaniaga’s capability in developing a procurement and logistical computerised system i.e. Pharmacy Information System (PHIS) which play a vital and integral role in ensuring the distribution of drugs to patients and effective management of stock levels is a plus point. However, Pharmaniaga suffers from a lack of earnings visibility beyond 31 Dec 2021 when the concession extension expires. TP is raised from RM1.35 to RM1.80 based on 8x FY21E EPS. UP maintained.

Results’ highlights. QoQ, 2QFY20 top-line fell 21% as demand from government and private hospitals in Malaysia and Indonesia were impacted by the pandemic. PBT fell 54% due largely to lower contribution from manufacturing. Correspondingly, 2QFY20 PATAMI came in at RM10m (-56%) dragged down by a higher effective tax rate of 33% compared to 27% in 1QFY20. A 2nd interim dividend of 2.5 sen was announced bringing 1HFY20 DPS to 8.5 sen, within expectation.

YoY, 1HFY20 revenue rose 6% due to increased orders from concession and non-concession businesses and government hospitals mainly due to higher sales of personal protective equipment in response to the Covid-19 outbreak. The Logistics and Distribution division’s PBT rose 96%, driven by stronger contributions from non concession as well as lower operating costs which more than offset lower Manufacturing division (-54%). This brings core PATAMI higher by 12%.

Outlook. The Government has agreed to provide a 25-month interim concession period for procurement of drugs to Pharmaniaga after its concession ended 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.

Maintain UP. The share price has risen sharply since July on talks that Pharmaniaga will be selected to package the Covid-19 vaccine once it is developed. However, we caution that such talks are premature and even if selected, there may be multiple packagers of the vaccine. It is also unclear at this stage as to the financial impact of such a venture, mindful that the government will likely want to see it delivered in the most competitive manner as possible. TP is raised from RM1.35 to RM1.80 based on 8x FY21E EPS (previously 6x) due to improved short to medium term outlook. However, this raised multiple is -1.5SD below 5-year historical forward mean due to lack of earnings clarity beyond FY21. The recent run up in its share price has rendered current valuation to be unattractive, which seems to have over-priced the positive near-term prospects. Reiterate Underperform.

Key risk is higher-than-expected volume sales

Source: Kenanga Research - 21 Aug 2020