Despite disappointing 1HFY23 results, we remain sanguine on MGRC’s earnings outlook, especially from 2HFY23 onwards. This is driven by its biopharmaceutical division which is gradually ramping up distribution network and footprint overseas. Hence, despite cutting our FY23F and FY24F net profit by 16% and 11%, respectively, and TP by 11% to RM0.95 (from RM1.07), we reiterate our OUTPERFORM call.

MGRC’s 1HFY23 results missed our expectation, registering a net loss of RM0.4m against our full-year net profit forecast of RM6.2m. The variance came largely from higher-than-expected start-up costs and slower-than expected ramping up of its new range of biopharmaceutical products.

QoQ, 2QFY23 dips into a net loss of RM1.2m compared to a net profit of Rm0.8m in 1QFY23 due to: (i) the absence of contribution from COVID-19 related products and services and lower-than-expected contribution of biopharmaceutical products (immunotherapy and cell therapies including producing Car-T cells and natural killer cells), and (ii) the higher-than expected costs incurred by the development of new products in the biopharmaceutical segment, as well as start-up costs from its new laboratory.

YoY, 1HFY23 revenue fell 68% due to the absence of vaccine sales and COVID-19 related products and lower-than-expected contributions from biopharmaceutical products (immunotherapy and cell therapies including producing Car-T cells and natural killer cells). Coupled with higher-than expected start-up costs at its new laboratory (which we gathered will be tailing off), it registered a small net loss of RM0.4m in 1HFY23, compared to a net profit of RM1.3m in 1HFY22.

Outlook. The group reiterated that its earnings growth is expected to gather momentum in coming quarters driven by their biopharmaceutical products as it ramps up its distribution network and footprint overseas. Already, the group had, in 1QFY23, registered maiden contributions from Thailand and Middle East and expect orders to continue to flow through in coming quarters. Over the past 12 months, the group has established alliances with key distributors that have their respective captive markets to distribute its products and services. It has formed collaboration with: (i) Ajlan & Bros Medical Company, Saudi Arabia, to distribute genetic tests and cell therapies in the Middle East and North Africa region, and (ii) Acquest Healthcare Stem Cell Research to produce CAR T-cells for supply to Acquest's customer which provide various cell therapies to hospitals, doctors, and patients in Thailand.

Forecasts. We cut our FY23F and FY24F net profit by 16% and 11%, respectively, to reflect a slower ramping up of the production at its new biopharmaceutical plant and higher-than-expected start-up costs. We cut our TP by 11% to RM0.95 (from RM1.07) based on 17x FY24F EPS, in line with the average forward PER of its international peers. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3).

We like MGRC for: (i) the rising adoption and hence tremendous growth potential of immunotherapy globally, (ii) having the exclusive rights to deliver such therapy in the region under a long-term licensing agreement with reputable principals, and (iii) being the leading provider of genetic sequencing and analysis in Southeast Asia. Reiterate OUTPERFORM.

Key risks to our recommendation: (i) failure in clinical trials could scupper new-product break-through, potentially leading to the inability to recover cost incurred for the pre-clinical and clinical trials, and (ii) dependency on commercialisation of new products and slower-than-expected commercial operation of the new lab to generate new revenue stream in the future.

Source: Kenanga Research - 27 Feb 2023