The Ministry of Health (MoH) has extended PHARMA’s medical supply concession by seven years ending 30 Jun 2030. We are positive on the latest development although this is in-line with market expectations. Meanwhile, the clock is ticking on a more viable and holistic regularisation plan to lift PHARMA out of its Practice Note 17 (PN17) status. We maintain our forecasts, TP of RM0.33 and UNDERPERFORM call.

The MoH has extended PHARMA’s medical supply concession by seven years (spanning from 1 July 2023 to 30 Jun 2030). This will eventually supersede the interim supply agreement first started on 1 Dec 2019 (but will remain in place pending the finalisation of the concession extension agreement as mentioned). PHARMA is expected 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 market expectations. 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).

Outlook. The group is confident of its future prospects amid a strategic plan to recover from the PN17 classification and is currently formulating a regularisation plan. We project pedestrian earnings growth in FY23 at levels similar to pre-COVID, averaging RM40m RM60m driven by regular orders for medical supplies from the Ministry of Health concession.

Forecasts. Maintained.

Similarly, we keep our TP of RM0.33 based on 9x FY24F EPS, at a 35% 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).

We are cautious due to: (i) the negative shareholders’ equity of RM143m as at 31 Mar 2023 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). Reiterate UNDERPERFORM.

Key risks to our call include: (i) appointment of new concessionairesby the government, (ii) its PN17 regularisation plan being less dilutive to existing shareholders, and (iii) privatisation at a significant premium to the current market price.

Source: Kenanga Research - 13 Jul 2023