9MFY20 core PATAMI of RM34m (+15% YoY) came in at 50%/47% of our/consensus forecasts. The results came in below our expectation due to lower-than-expected concession demand. We cut FY20E net profit by 11% to take into account the lower concession demand. However, we maintain our FY21E earnings forecast. The share price has run up ahead of earnings expectation and fundamentals in anticipation of Pharmaniaga being selected to package the Covid-19 vaccine once it is commercialised. No change to our TP of RM1.80 based on 8x FY21E EPS. UP maintained.

Results’ highlights. QoQ, 3QFY20 top-line fell 3% as demand from concession business and Indonesia were impacted by the pandemic. PBT fell 71% due largely to lower contribution from manufacturing (- 74%) and logistics (-66%). Correspondingly, 3QFY20 PATAMI came in at RM1.4m (-86%) dragged down by a higher effective tax rate of 68% compared to 33% in 2QFY20. A 3rd interim dividend of 1.5 sen was announced bringing 9MFY20 DPS to 10.0 sen came in above expectation. Raise our FY20E DPS assumption from 10 sen to 12 sen.

YoY, 9MFY20 revenue fell 1% due to lower concession but orders from non-concession businesses mainly due to higher sales of personal protective equipment in response to the Covid-19 outbreak helped cushion further downside. The Logistics and Distribution division’s PBT rose 238%, driven by stronger contributions from non-concession as well as lower operating costs which more than offset lower Manufacturing division (-73%). This brings PATAMI higher by 15%.

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 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.

We cut our FY20E net profit by 11% to take imputing lower contribution from concession business. However, we maintain our FY21E earnings forecast.

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 commercialised. However, we caution that such talks are premature and even if selected, there may be multiple packagers for 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 unchanged at RM1.80 based on 8x FY21E EPS (-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 valuations unattractive, which seems to have over priced the positive near-term prospects.

Key risk is higher-than-expected volume sales.

Source: Kenanga Research - 20 Nov 2020