The Ministry of Health (MoH) has given a 7-year extension (ending 30 Jun 2030) to PHARMA’s medical supply concession. This is in line with our expectation that the concession will be extended. We maintain our forecasts, TP of RM0.31 and UNDERPERFORM call.

The MoH and PHARMA’s wholly-owned Pharmaniaga Logistics Sdn Bhd (PLSB) have entered into a concession agreement (CA) which will allow PLSB to undertake the procurement, storage, supply and delivery of medical products to offices and facilities within Malaysia operated and controlled by the MoH. The CA will take effect retrospectively from 1 July 2023 for a period of seven (7) years until 30 June 2030 subject to an earlier termination. Recall, PHARMA was given a 6-month interim extension (ending 30 Jun 2023) to its medical supply concession pending the finalisation of a new concession agreement.

As stipulated in the CA, PHARMA is required to undertake the procurement, storage, supply and delivery of medical products and implement the Pharmacy Information System (PhIS) and Clinic Pharmacy System (CPS) maintenance, licence renewal, change request and system implementation at the new facilities based on existing operating cost rates. Additionally, PHARMA is required to build 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.

We are positive on this latest development which is in line with our expectation that the concession is now formally signed and extended. There were scant details of the CA. However, we are mindful that the government seeking better value-for-money contracts and PHARMA might have to offer new rates that are more competitive (of which we have reflected in our forecasts).

Forecasts. Maintained. We also retain 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 RM40m−RM60m driven by regular orders for medical supplies from the MoH concession. PHARMA guided for no further provisions going forward. It has managed to sell some vaccines while still keeping some unsold ones (which have been fully provided for). 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.

We remain cautious on PHARMA due to the negative shareholders’ equity of RM264m as at 30 Sep 2023 impeding its ability to give out dividends. Reiterate UNDERPERFORM.

Key risks to our call include: (i) the 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 Jan 2024