We initiate coverage on Kotra Industries Berhad (KOTRA) with an OUTPERFORM call and TP of RM7.00. We like KOTRA for: (i) the bright prospects of the over-the-counter (OTC) drug market, (ii) its integrated business model encompassing the entire spectrum of the pharmaceutical value chain from R&D, product conceptualisation to manufacturing and sales, (ii) the superior margins of its original brand manufacturing (OBM) business model (vs. low-margin contract manufacturing) with established household brands such as Appeton.

It is integrated. It has scale. It has reach. These three attributes embody the essence of KOTRA’s business model. The group’s business model encompasses the entire spectrum of pharmaceutical value chain from product conceptualisation starting from R&D to manufacturing and sales. The Group offers a suite of healthcare products of over-thecounter supplements (OTC), nutritional and pharmaceutical products. The key flagship brands are namely Appeton, Axcel and Vaxcel.

Capitalising on rising out-of-pocket healthcare pharmacies spending. We expect Kotra to capitalise on rising out-of-pocket health expenditure to pharmacies. Case in point, out-of-pocket healthcare spending in Malaysia to private pharmacies (Kotra’s OTC products accounts for 50% of its FY22 revenue) delivered a 10-year CAGR of 11%.

Bright outlook, local OTC industry market to grow at a 2022-2027 CAGR of 6% over the next 5 years. According to the Consumer Market Outlook, in Malaysia, the OTC pharmaceuticals market is forecasted to grow at a CAGR of 6% to an estimated USD715m (RM3.2b) by 2027. Amplifying the growth potential is the surge in worldwide demand for health supplement products, as consumers take a more proactive stance towards their health and well-being, especially following the COVID-19 pandemic. Zooming to Malaysia, the growth of the domestic OTC market going forward augers well for Kotra since its OTC segment makes up 53% of FY22 revenue.

Superior margins compared to peers. Kotra’s investment appeal lies in its superior margins amongst local listed comparable peers. The combined impact of economies of scale and scope and sales effectiveness translate to superior financial metrics. In FY22, it exhibited one of the highest EBITDA margin at 35%. On average, KOTRA’s average FY17-FY22 EBITDA margin is at 24% which is higher than that of the industry average of about 12%.

Initiate coverage with a TP of RM7.00. We like KOTRA for: (i) the bright prospects of the over-the-counter (OTC) drug market, (ii) its integrated business model encompassing the entire spectrum of the pharmaceutical value chain from R&D, product conceptualisation to manufacturing and sales, (ii) the superior margins of its original brand manufacturing (OBM) business model (vs. low-margin contract manufacturing) with established household brands such as Appeton.

We value KOTRA at RM7.00 based on 15x FY24F EPS, in line with its peers’ average. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 12).

Source: Kenanga Research - 8 Dec 2022