KOTRA’s FY23 results met expectations. Its FY23 net profit rose 5% YoY as consumers snapped up health supplements amidst rising cases of the common flu and influenza-like illnesses. Over the immediate term, an expanding domestic over-the-counter (OTC) market augurs well for KOTRA. We maintain our forecasts, TP of RM7.00 and OUTPERFORM call.

Its FY23 net profit of RM65m met our forecast and consensus estimate. A second interim dividend of 15.5 sen was declared, bringing its full-year DPS to 25.5 sen.

YoY, its FY23 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). However, its EBITDA only rose by 7% on increased advertising and promotional expenses to widen its brand awareness.

QoQ, its 4QFY23 revenue fell 6%. We are unperturbed and regard this as nothing more than a normal quarterly fluctuation. However, its 4QFY23 net profit fell by a larger 25% due to higher 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% due to economies of scale and better overhead absorption rate thanks to incremental sales, and (iii) an effective tax rate of 9% and 10% in FY24 and FY25, 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 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 maintain our FY24F net profit and introduce FY25F numbers. We retain our TP of 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 commercialisation of new products and slower-than-expected commercial operation of the new lab to generate new revenue stream in the future.

Source: Kenanga Research - 24 Aug 2023