PHARMA has proposed to undertake a second private placement of new shares, following the first just slightly more than a month ago. The latest corporate exercise will not lift it out of the PN17 status but the proceeds raised will help to fund its working capital while it formulates a plan to regularise its financial situation. Pending the completion of the exercise, we maintain our forecasts, TP of RM0.33 and UNDERPERFORM call.

PHARMA announced a private placement of up to 144m new shares or 10% of its total issued shares to Lembaga Tabung Angkatan Tentera at an issue price to be determined later. The proposed private placement is expected to be completed by 3QCY23. This is the second proposed private placement of new shares undertaken by PHARMA. Recall, in June 2023 (refer to our PHARMA report dated 14 June 2023), PHARMA proposed to undertake a private placement of 131m new shares of which price was recently fixed at 35 sen/share to third-party investors. For illustration purposes, based on an indicative issue price of RM0.35/share: (i) the latest proposed private placement is expected to raise RM50m which is earmarked for working capital; (ii) the combined aggregate of both private placements is expected to raise RM97m which will marginally improve PHARMA’s net debt of RM1.19b as at 31 Mar 2023 to a net debt of RM1.09b; and (iii) the combined private placements are expected to dilute FY24F EPS by about 15%.

We are neutral on this latest corporate move by PHARMA as it is just a stop-gap measure while finding a holistic solution to lift it out of the PN17 status.

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

Forecasts. Maintained pending the completion of the exercise.

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 give 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 concessionaires by 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 - 24 Jul 2023