Despite disappointing FY23 results, we remain sanguine on MGRC’s earnings outlook driven by its biopharmaceutical division which is gradually ramping up its distribution network and will no longer weigh down by lumpy development and start-up costs. We maintain our FY24F net profit, TP of RM0.80, and our OUTPERFORM call.

Its FY23 results missed our expectation, registering a core net loss of RM6.8m against our full-year net profit forecast of RM1.8m. The variance came largely from higher-than-expected start-up costs which we believe is coming to a tail-end and slower-than-expected ramping up of its new range of biopharmaceutical products.

YoY, its FY23 revenue fell 71% due to the absence of vaccine sales and COVID-19 related products and lower-than-expected contributions from biopharmaceutical products (immunotherapy and cell therapies including producing Car-T cells and natural killer cells). Coupled with higher-than expected start-up costs incurred by the development of new products, it registered a net loss of RM6.8m in FY23, compared to a net profit of RM7.2m in FY22.

QoQ, its 4QFY23 net loss widened marginally to RM3.5m compared to RM2.9m in 3QFY23 due to: (i) the absence of contribution from COVID-19 related products and services and lower-than-expected contribution of biopharmaceutical products (immunotherapy and cell therapies including producing Car-T cells and natural killer cells), and (ii) the higher-than expected costs arising from the development of new products in the biopharmaceutical segment which we believe has come to a tail-end.

Outlook. The group reiterated that its earnings growth is expected to gather momentum in coming quarters driven by their biopharmaceutical products as it ramps up its distribution network and footprint overseas. Already, the group had, in 1QFY23, registered maiden contributions from Thailand and Middle East and expect orders to continue to flow through in coming quarters. To capitalise on its growing distribution network, the Group is applying its genomics and pharmaceutical expertise to develop a portfolio of products for the fast-moving consumer goods market. This includes novel ingredients and finished products for cosmeceuticals, wound healing, and genetic-based fitness improvement programs. Over the past 12 months, the group has established alliances with key distributors that have their respective captive markets to distribute its products and services. The group seeks and engages with strategic partners across Southeast Asia, the Middle East North Africa region and, most recently, the United States.

Forecasts. We maintain our FY24F set and introduce FY25F numbers. We retain our TP of RM0.80 based on 17x FY24F EPS, in line with the average forward PER of its international peers. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3).

We like MGRC for: (i) the rising adoption and hence tremendous growth potential of immunotherapy globally, (ii) having the exclusive rights to deliver such therapy in the region under a long-term licensing agreement with reputable principals, and (iii) being the leading provider of genetic sequencing and analysis in Southeast Asia. Reiterate OUTPERFORM.

Key risks to our recommendation: (i) failure in clinical trials could scupper new-product break-through, potentially leading to the inability to recover cost incurred for the pre-clinical and clinical trials, and (ii) 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 - 29 Aug 2023