PHARMA guided for no further provisions going forward. It still holds some unsold vaccines (which have already been fully provided for) and has managed to sell some. It is building four new warehouses to meet the requirement for a government concession. We maintain our forecasts, TP of RM0.31 and UNDERPERFORM call.

We came away from PHARMA’s post-3QFY23 results briefing feeling cautious. The key takeaways are as follows:

1. It guided for no further provisions going forward. It still keeps some unsold vaccines (which have been fully provided for) and has managed to sell some. To recap, PHARMA in 3QFY23 dipped into the red, registering a loss of RM49m due to the write-offs for: (i) slow-moving expiring inventories namely personal protective equipment and needles (RM65m), and (ii) product development costs (RM7.6m) due to the non-commercial viability of the products.

2. It is building four new warehouses, being part of a RM220m capex plan to be funded with proceeds from a rights issue and a private placement of new shares. This is to meet the requirement in relation to the government concession to provide timely delivery of drugs and non-drugs products to government facilities throughout the country.

3. In the biopharmaceutical space, it is establishing manufacturing facilities for vaccines and insulin to cope with the increasing needs in these therapeutic areas. The project is on track for commercialisation for vaccines in 2025 and insulin in 2026. It will produce Recombinant Human Insulin and Analogue Insulin.

4. PHARMA expects its Indonesian operation to stay profitable in 4QFY23, having already achieved a 9MFY23 PBT of RM7.2m driven by operational efficiency gains through on-going inventory optimisation efforts and aggressive payment collection. Specifically, it has managed to keep tabs on fast moving SKUs and reduce slow moving stocks and lowering working capital requirements.

5. PHARMA is hopeful to exit PN17 status by end-CY2024. Recall, PHARMA has proposed to regularise its financial situation via: (i) a proposed capital reduction and cancellation of RM180m issued share capital, (ii) a 4-for-5 rights issue of 1.18b new PHARMA shares with 1.18b free warrants (a shareholder who owns 5,000 PHARMA shares is entitled to subscribe for 4,000 new shares and get 4,000 free warrants), and (iii) a proposed private placement of 714m new PHARMA shares or 26.9% of the enlarged issued share capital after the proposed rights issue.

6. For illustration purposes, (i) based on an indicative rights issue price of RM0.30/share and current share price of RM0.33/share, the theoretical ex-rights price is RM0.32/share, (ii) based on an indicative issue price of RM0.30/rights share and RM0.42/placement share, this will raise a combined RM655m which is earmarked for repayment of borrowings (RM264m), working capital (RM160m), and capex (RM220m), (ii) the RM264m will marginally improve PHARMA’s net debt of RM1.1b as at 30 Sept 2023 to a net debt of RM0.85b, and (iii) the enlarged number of shares will triple from 1.44b to 3.37b which will be EPS dilutive.

Forecasts. Maintained.

We also maintain our TP of RM0.31 based on 10x FY24F EPS, at a 35% discount to the average of its peers 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).

Outlook. We project pedestrian earnings growth in FY24 at level similar to pre-COVID, averaging RM 0m─RM 0m driven by regular orders for medical supplies from the Ministry of Health concession.

We remain cautious on PHARMA due to: (i) the negative shareholders’ equity of RM m as at 30 Sep 0 3 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. 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 - 5 Dec 2023