PHARMA’s 1HFY23 results disappointed. Its 1HFY23 net profit dived 84% in the absence of vaccine sales and on cost escalation. Meanwhile, the clock is ticking on a regularisation plan to lift it out of the Practice Note 17 (PN17) status. We cut our FY23 and FY24F net profit forecasts by 32% and 7% respectively, lower our TP by 9% to RM0.31 (from RM0.33) and reiterate our UNDERPERFORM call.

PHARMA’s 1HFY23 results disappointed. Its 1HFY23 net profit came in at RM4.6m (-84% YoY) or 9% and 11% of our and consensus full year net profit estimate, respectively. The variance against our forecast came largely from a higher-than-expected operating costs.

YoY, its 1HFY23 revenue rose a marginal 0.3% due largely to the absence of vaccine sales (+0.7%). However, its 1HFY23 net profit dived 84% due to an escalation in staff cost, start-up cost incurred in its new warehouses, as well as marketing and promotion expenses.

QoQ, its 2QFY23 revenue dipped 4% due to lower sales at its medical supply unit (-9%) which predominantly fulfils orders from the Ministry of Health (MoH) under a concession but cushioned by higher contribution from Indonesia (+12%). Its 2QFY23 net profit fell by a larger magnitude of 26% dragged down by higher operating costs, mainly due to higher staff costs. No dividend was declared in this quarter which was within our expectation.

Outlook. The group is confident of its future prospects amid its strategic plan to exit from the PN17 classification and is currently formulating a regularisation plan. The target is to submit a regularisation plan by 3QCY23 and complete it by 1QCY24. 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 MoH concession. Having received the letter of award in July 2023, the group's new concession agreement is anticipated to be signed by 3Q2023.

Forecasts. We cut our FY23 and FY24F net profit forecasts by 32% and 7% respectively. Consequently, we lower our TP by 9% to RM0.31 (previously RM0.33) based on 10x FY24F EPS, at a 35% discount to peers’ average due to its PN17 status. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3).

We remain cautious on PHARMA due to: (i) the negative shareholders’ equity of RM138m as at 30 June 2023 impeding its ability to give out dividends, and (ii) the government seeking better value-for-money contra cts 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) it bagging new government concessions, (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 - 14 Aug 2023