The Ministry of Health (MoH) has given a 6-month interim extension (ending 30 Jun 2023) to PHARMA’s medical supply concession, pending the finalisation of a new concession agreement. This is in-line with our expectation that the concession will be extended. We maintain our forecasts, TP of RM0.51 and MARKET PERFORM call.

The MoH has given a 6-month interim extension (ending 30 Jun 2023) to PHARMA’s medical supply concession pending the finalisation of a new concession agreement.During this period, PHARMA is required to implement the Pharmacy Information System (“PhIS”) and Clinic Pharmacy System (“CPS”) maintenance, license renewal, change request and system implementation at the new facilities based on existing operating cost rates.

We are positive on this latest development which is in-line with our expectation that the concession will be extended. However, we are mindful that the government will likely want to see better value-for money and hence PHARMA will have to offer new rates that are more competitive (of which we have reflected in our forecasts).

On a brighter note, we gathered from sources that the cost of key input, i.e. active pharmaceuticals ingredients (APIs) that sky-rocketed during the early part of 2022 is now moderating. Researcher ChemAnalyst, for instance, estimated that the global API prices declined by >2.5% in Nov 2022 and may experience further decline in December 2022 due to sluggish market demand. Typically, APIs account for about 30% of PHARMA’s total cost.

We like PHARMA for its strong earnings visibility backed by its long term medical supply concession with the MoH, from which cash flow anchors a dividend yield of 4%. However, its appeal as a growth stock has diminished with limited demand for its Covid-19 vaccine as most parts of the world are exiting the other end of the pandemic. Our TP of RM0.51 is based on 11x FY23F EPS, at a 25% discount to peers’ average due to its smaller market capitalisation. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3). Reiterate MARKET PERFORM.

Key risks to our call are: (i) non-renewal of concessions with the government, (ii) unsold Covid-19 inventory, and (iii) increased competition from both local and overseas players.

Source: Kenanga Research - 30 Dec 2022