KOTRA’s 1QFY24 results disappointed as consumers held back purchases, having overstocked right after the economy reopening. However, we remain upbeat on KOTRA driven by a growing domestic over-the-counter (OTC) market. We cut our FY24-25F net profit forecasts by 14% and 13%, respectively, reduce our TP by 14% to RM6.03 (from RM7.00) but reiterate our OUTPERFORM call.

Its 1QFY24 net profit of RM13.7m missed exepctations at only 20% of both our full-year forecast and the full-year consensus estimate. The variance against our forecast came largely from weaker-than-expected sales, we believe, as consumers held back purchases, having overstocked right after the economy reopening. No dividend was declared which is within our expectation.

YoY, its 1QFY24 revenue fell 18%, we believe, as consumers held back from buying as they ran down their excess supplies as mentioned above. Its net profit only declined by 25% due to a higher effective tax rate. Its EBITDA margin fell 2ppts to 31% due to lower-than-expected sales leading to poorer cost absorption.

QoQ, its 1QFY24 turnover fell 4% but its net profit rose 4% which we believe was due to the absence of advertising and promotion expenses.

Forecasts. We cut our FY24-25F net profit forecasts by 14% and 13%, as we: (i) moderate our sales volume growth assumptions from 9-11% to 4-11%, and (ii) reduced our EBITDA margin assumptions from 34-35% to 31-33%, respectively.

Consequently, we reduce our TP by 14% to RM6.03 (from 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).

Outlook. Looking ahead, KOTRA’s earnings will be driven by an expanding domestic OTC market. Its OTC segment made up 53% of its FY22 revenue. The out-of-pocket healthcare spending in Malaysia at 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 at pharmacies.

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 include: (i) failure in clinical trials could scupper new products 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 - 29 Nov 2023