According to an announcement to Bursa Malaysia, Pharmaniaga has entered into an agreement with the Government of Malaysia for the purchase and distribution of Covid-19 vaccine developed by Sinovac Life Sciences Company Limited. We increase our TP from RM1.80 to RM3.15 by ascribing a higher PER of 14x based on FY21 EPS (from previously 8x) to reflect Pharmaniaga's ability to secure the vaccine fill-and-finish venture after sealing the agreement. However, Underperform call reiterated as share price has raced ahead of the prospects.

Inks vaccine agreement. In an announcement to Bursa Malaysia, its wholly-owned Pharmaniaga Lifescience Sdn Bhd (PLS) has entered into a term sheet agreement with the Government of Malaysia for the purchase and distribution of Covid-19 vaccine developed by Sinovac Life Sciences Company Limited (subsidiary of Sinovac Biotech Ltd). The agreement enables PLS to supply 12m doses of finished Covid-19 CORONAVAC, SARS-COV-2 Vaccine (Vero Cell) Inactivated (developed by SINOVAC LS), and fill-and-finished activity in PLS, to be delivered to hospitals, clinics and any other facilities nationwide as instructed by Ministry of Health of Malaysia (MOH), expected to commence in Feb 2021. The agreement shall be effective from 26 January 2021 and shall remain in force for one year, subject to an earlier termination by either party for failing to meet obligations or upon entering into the definitive agreement. However, we caution that it is also unclear at this stage as to the financial impact as no guidance were given for now in terms of pricing and margins and we are also mindful that the government will likely want to see it delivered in the most competitive manner as possible. However, we highlight here that PBT margin for Logistics & Distribution segment of which the distribution of the vaccine is expected to fall under is razor-thin, averaging at 0.5% over the past 20 quarters.

Outlook. Although we are positive of this latest news, we believe it has been priced in. More importantly, the stock lacks earnings visibility beyond the interim extended concession period from 1st Dec 2019 to 31st Dec 2021 for procurement of drugs from the government which 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.

Maintain UP. No change to our earnings forecasts. The share price has risen sharply since July on talks that Pharmaniaga will be selected to package the commercialised Covid-19 vaccine. TP is raised from RM1.80 to RM3.15 based on 14x FY21E EPS (previously 8x) (close to - 1.0SD below 5-year historical forward mean) on its ability to secure the vaccine fill-and-finish venture after sealing the agreement. The recent run-up in its share price has rendered current valuations unattractive, which seems to have over-priced the positive near-term prospects. Note that the stock lacks earnings visibility beyond the interim extended concession period from 1st Dec 2019 to 31st Dec 2021 for procurement of drugs as mentioned above.

Key risk is higher-than-expected volume sales.

Source: Kenanga Research - 27 Jan 2021