FY20 core PATAMI of RM27.5m (-52% YoY) came in weak at 50%/50% of our/consensus forecasts due to lower-than- expected concession demand. We cut FY21E net profit by 20% to take into account lower concession demand. Its share price has run up ahead of earnings expectation and fundamentals, especially on earlier anticipation of Pharmaniaga being selected to package Covid-19 vaccine. Correspondingly, we cut our TP from RM3.15 to RM2.50 based on unchanged 14x FY21E EPS. UP maintained.

Results’ highlights. QoQ, 4QFY20 top-line rose 2% due to stronger demand from Indonesia (+16%) which offset lower manufacturing (- 20%) and logistics (-4%) segments. However, 4QFY20 earnings fell into the red with a loss before tax of RM13.5m compared to a pre-tax profit of RM4.5m in 3QFY20 due largely to losses suffered at both manufacturing and logistics segments as a result of higher operating expenses arising from urgent delivery required by the hospitals during the pandemic. Correspondingly, 4QFY20 LATAMI came in at RM6.3m compared to a PATAMI of RM1.4m in 3QFY20 which was negated by over-provision of tax liability. A 4th interim dividend of 1.0 sen was announced bringing FY20 DPS to 11.0 sen, in line with expectation.

YoY, FY20 revenue fell 3% due to lower concession business 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 achieve a pre-tax profit compared to a loss, driven by stronger contributions from non-concession as well as lower operating costs which more than offset lower Manufacturing division’s earnings (-73%). This brought PATAMI lower by 52%.

Outlook. Pharmaniaga has entered into an agreement for the purchase and distribution of Covid-19 vaccine developed by Sinovac Life Sciences Company Limited of which we believe has already been priced in. The agreement is for the supply of 14m doses of Covid-19 vaccine to be carried out through the fill and finish activity. However, it is 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 price-competitive manner possible. We highlight here that PBT margin for Logistics & Distribution segment is razor-thin, averaging at 0.2% over the past 20 quarters. The recent run-up in its share price has rendered current valuations unattractive, which seems to have over- priced the positive near-term prospects. Furthermore, the stock lacks earnings visibility beyond the interim extended concession period from 1st Dec 2019 to 31st Dec 2021 for procurement of drugs 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.

We cut our FY21E net profit by 20% imputing lower contribution from concession business.

Maintain UP. Corresponding to the cut in FY21E earnings, we also lower our TP from RM3.15 to RM2.50 based on unchanged 14x FY21E EPS. The share price has risen sharply since 3Q 2020, propelled by market-talk then that Pharmaniaga would be selected to package the Covid-19 vaccine, which has rendered current valuations unattractive which seems to have over priced the near-term prospects.

Key risk is higher-than-expected volume sales.

Source: Kenanga Research - 18 Mar 2021