1HFY21 PATAMI of RM36.8m (+14% YoY) came in at 79%/69% of our/consensus forecasts. Although results came in above expectations due to better-than-expected volume sales, we had forewarned that its erratic performance over the past eight quarters or two FYs where 2H earnings only accounts for <30% of full-year earnings. Nevertheless, we raise our FY21E/FY22E net profit forecast by 23%/9%. TP is raised from RM0.50 to RM0.54 based on 14x FY22E EPS. Reiterate UNDERPERFORM.

Results’ highlights. QoQ, 2QFY21 top-line rose 48% due largely to sales of the Sinovac COVID-19 vaccine to the government. However, PBT margin halved from 4% to 2% due to higher selling and distribution expenses incurred on the frequent delivery of Sinovac COVID-19 vaccine to Pusat Pemberian Vaksin coupled with an increase in advertising and promotion expenses for over-the-counter consumer products. Revenue in manufacturing grew 5-fold due to the Sinovac COVID 19 vaccine. Correspondingly, 2QFY21 pre-tax profit fell 29% to RM22m which was further dragged down by losses at Indonesia of RM4.3m compared to a profit of RM3.9m in 1QFY21. This brought 2QFY21 PATAMI lower by 41% to RM13.7m, further exacerbated by a higher effective tax rate of 38% compared to 28% in 1QFY21. A 2nd interim dividend of 1.5 sen was declared, bringing 1HFY21 DPS to 2.3 sen which is above our expectation.

YoY, 1HFY21 revenue rose 35% due largely to strong demand from the concession business and sales of Sinovac COVID-19 vaccine to the government. The Logistics and Distribution division recorded a lower PBT of RM33m (-12%) as demand for personal protective equipment normalised including ventilators. The Manufacturing division turned in a PBT of RM24m (+90%) mainly contributed by the Sinovac COVID-19 vaccine. This brings 1HFY21 PATAMI to RM36.8m (+14% YoY).

Outlook. The Group has successfully delivered the last batch of the COVID-19 vaccine supply totalling 12.4m doses to the government on 21 July 2021. In addition, the Group has also supplied additional 2m doses to the government at the end of July 2021. Recall that in Aug 2021 the Group was awarded a combined purchase of additional 6m doses of fill-and-finish and imported finished product of Covid-19 vaccine to supply to the government. The group’s balance sheet for the latest quarter revealed a higher receivable due to sales of COVID-19 vaccines to the government, with collections received in July 2021 of approximately RM320m. In addition, higher receivables were also due to advance payment made to the supplier on purchase of COVID-19 vaccines of close to RM120m and sales of leukaemia drugs to the government around RM90m. Hence, the Sinovac vaccine distribution is expected to impact from 2HFY21 onwards but it is unclear at this stage as to the profit impact, mindful that the government will likely want to see it delivered in the most price-competitive manner possible. The stock lacks earnings visibility beyond the interim extended concession period from 1st Dec 2019 to 31st Dec 2021 for procurement of drugs 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 raise our FY21E/FY22E net profit by 23%/9% due to the better-than-expected results.

Maintain UP. Correspondingly, we raise our TP from RM0.50 to RM0.54 based on unchanged 14x FY22E EPS (-1.5SD below its 5-year historical forward mean) as we roll forward our valuations. The discount is to reflect the questionable sustainability of vaccine-driven earnings growth and uncertainty over the concession to supply medicine and medical supplies beyond Dec 2021. Key risk is higher-than-expected volume sales.

Source: Kenanga Research - 23 Aug 2021