KOTRA’s 9MFY23 results beat expectations as consumers took precautionary steps amidst rising cases of the common flu and influenza-like illnesses by stocking up on health supplements. We raise our FY23F net profit by 9% but keep our FY24F numbers. We maintain our TP at RM7.00 (based on FY24F earnings) and reiterate our  OUTPERFORM call.

9MFY23 net profit of RM52m exceeded expectations, coming in at 83% and 78% of our full-year forecast and the full-year consensus estimate,  respectively. The variance against our forecast came largely from strong sales as consumers stocked up health supplements. No dividend was  declared in this quarter which came in within our expectation.

YoY, 9MFY23 revenue rose 17%, we believe, driven by an increase in demand for health supplement products as consumers take precautionary steps amidst rising cases of the common flu and influenza-like illnesses  (following increased contacts within the population after the lifting of pandemic restrictions). EBITDA only rose by 10% on increased advertising and promotional expenses to widen its brand awareness.

QoQ, 3QFY23 revenue fell 5%. We are unperturbed and regard this as nothing more than a normal quarterly fluctuation and take comfort that  3QFY23 revenue rose 8% YoY. 3QFY23 net profit rose 6% due to lower advertising and promotional expenses.

Outlook. Looking ahead, earnings are expected to be driven by: (i) the growing trend for the consumption of health supplements for better defence against communicable diseases, (ii) its sustainable EBITDA  margin of 34%-35% due to economies of scale and better overhead absorption rate thanks to incremental sales, (iii) an effective tax rate of  8% and 10% in FY23 and FY24, respectively, below the statutory rate due to unabsorbed business losses and unutilised reinvestment allowances.

An expanding domestic over-the-counter (OTC) market going forward augurs well for KOTRA since its OTC segment makes up more than half of revenue, i.e. 53% of FY22 revenue. The out-of-pocket healthcare spending in Malaysia to private pharmacies (KOTRA’s OTC products accounts for 50% of its FY22 revenue) has grown at a 10-year CAGR of  11%. We expect KOTRA to capitalise on rising out-of-pocket health expenditure spend on pharmacies.

Forecasts. We raise our FY23F net profit by 9% as we raise our sales volume growth assumptions from 16% to 19% and effective tax rate of  4% instead of 10%. However, we keep our FY24F earning unchanged.  Our TP remains unchanged 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 3).

We continue to like KOTRA for: (i) the bright prospects of the 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, and (iii) the superior margins of its original brand manufacturing (OBM) business model (vs. low-margin contract manufacturing) with established household brands such as Appeton. Maintain OUTPERFORM.

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

Source: Kenanga Research - 29 May 2023