1QFY21 PATAMI of RM22.5m (-0.5% YoY) came in at 46%/41% of our/consensus forecasts. We consider the results to be within expectations due to its erratic performance over the past eight quarters or two FYs where 2H earnings only accounts for <30% of full-year earnings. 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. We maintain our TP of RM2.50 based on unchanged 14x FY21E EPS as well as the UNDER PERFORM rating.

Results’ highlights. QoQ, 1QFY21 top-line rose 25% due to stronger demand from the government and private hospitals in Malaysia. Revenue in manufacturing and logistics grew 27% and 41%, respectively. Correspondingly, 1QFY21 recorded a pre-tax profit of RM31.5m compared to a loss of RM13.5m driven by profitability from both manufacturing and logistics. This brought 1QFY21 PATAMI to RM22.5m compared to a LATAMI of RM6.3m in 4QFY20. A 1st interim dividend of 4.0 sen was declared, is in line with our expectation. YoY, 1QFY21 revenue fell 3% due to lower demand from the Indonesian business due to the on-going Covid-19 outbreak. The Logistics and Distribution division’s pre-tax profit rose 2% due to the reduced finance cost as a result of the lower overnight policy rate by Bank Negara Malaysia while manufacturing pre-tax profit rose 16% due to operational efficiencies.

Outlook. Pharmaniaga has entered into an agreement for the purchase and distribution of Covid-19 vaccine developed by Sinovac Life Sciences Company Limited, factor we believe has already been priced in its share price. The agreement is for the supply of Covid-19 vaccine to be carried out through the fill and finish activity. Its balance sheet for the latest quarter revealed a near doubling of receivables from RM288m to RM545m which management attributed to pending collection for the advanced payment of Covid-19 vaccine of RM101m which was received in April. Hence, the Sinovac vaccine distribution is expected to impact from 2QFY21 onwards but it is unclear at this stage as to the profit 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 may have been due to expectations of Sinovac distribution. For illustration purposes, assuming 12m dosses, USD13.60/dose and a net profit margin of 2% which works out to a net profit of approximately RM13m over the next two years, the impact is approximately 14% each of our FY21E and FY22E net profit forecasts. Hence the sharp price run up looks to have rendered current valuations unattractive, which seem 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. Note that Pharmaniaga proposed a 4 for 1 bonus issue in early May 2021.

Maintain UP. We maintain our TP of 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. This has rendered current valuations unattractive which seem to have over played the near-term prospects. Key risk is higher-than-expected volume sales.

Source: Kenanga Research - 24 May 2021