PHARMA dropped a bombshell by announcing a RM607m net loss in FY22 due to a Covid-19 vaccine inventory write-off. It also announced that it has fallen under the PN17 status that requires a regularisation plan. Hence, we cut our FY23F net profit by 19%, lower our TP by 34% to RM0.33 (from RM0.51) and downgrade our call to UNDERPERFORM from MARKET PERFORM.

PHARMA’s reported a net loss of RM607m in FY22 vs. our profit forecast and consensus profit estimate of RM65m and RM62m, respectively. The variance against our forecast came largely from a Covid-19 vaccine inventory write-off.

QoQ, 4QFY22 revenue fall 7% due to lower sales at its medical supply unit (-8%) which predominantly fulfils orders from the Ministry of Health (MoH) under a concession and mitigated by improved topline performance of its generic drugs (+14%) due to strong demand for cold, fever, and cough medicines, and children medication in private clinics and hospitals due partially to a rise in cases of common flu and influenza-like illnesses. However, 4QFY22 dips into a loss of RM644m due to write-down of slow-moving Covid- 19 vaccines inventory (RM552m) and impairment on goodwill (RM50m) compared to a RM9m profit in 3QFY22. This was further exacerbated by higher-than-expected operating costs as a result of the opening of three new warehouses. No 4th interim dividend was proposed which came in below our expectation.

YoY, FY22 revenue fell 27%. Sharply lower vaccine sales (-83%) were offset by slightly better sales at its medical supply unit (+11%) and improved topline performance from its Indonesia operation (+10%). However, FY22 dips into a loss of RM607m due to write down for slow-moving inventories namely Covid-19 vaccines (RM552m) and impairment on goodwill (RM50m) compared to RM172m profit in FY21 which was further exacerbated by escalation in staff cost, start-up cost incurred in its new warehouses, as well as marketing and promotion expenses.

Outlook. We project pedestrian earnings growth in FY23 at level similar to pre-COVID, averaging RM40-RM60m driven by regular orders for medical supplies from the MoH concession. We cut our FY23F net profit by 19% and introduce FY24F numbers. We roll over our valuation base year from FY23F to FY24F. TP is lowered by 34% to RM0.33 (from RM0.51) based on 9x FY24F EPS, at a 35% discount (previously 25%) 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 4).

We downgrade our rating from MARKET PERFORM to UNDERPERFORM. We are cautious due to: (i) the negative shareholders’ equity of RM249m as at 31 Dec 2022 impeding its ability to frank out dividends, and (ii) the government seeking better value-for-money contracts and PHARMA might have to offer new rates that are more competitive (which we have reflected in our forecasts).

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

Source: Kenanga Research - 28 Feb 2023