KOTRA’s 1HFY24 results disappointed as consumers held back purchases on weak spending sentiment. 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 16% and 9%, respectively, reduce our TP by 2% to RM5.90 (from RM6.03) but reiterate our OUTPERFORM call.

Its 1HFY24 net profit missed expectations at only 43% and 42% our fullyear forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from weaker-than-expected sales, we believe, as consumers held back purchases on weak spending sentiment. A 1st interim dividend of 12.5 sen was declared which is within our expectation.

YoY, its 1HFY24 revenue fell 13% as we think consumers likely held back purchases on weak spending sentiment. Its EBITDA margin fell by a steeper 25% on less-than-optimum economies of scale, both in terms of manufacturing and marketing, on reduced sales volumes. Its 1HFY24 net profit declined by 27% due to a higher effective tax rate.

QoQ, its 2QFY24 turnover rose 8% due to increased export sales which more than offset local market volumes. However, its net profit fell 15%, we believe, similarly, due to less-than-optimum economies of scale from low plant utilisation and poor absorption of advertising expenses.

Forecasts. We cut our FY24-25F net profit forecasts by 16-9%, as we: (i) moderate our sales volume growth assumptions to 3-10% (from 4-11%), and (ii) reduce our EBITDA margin assumptions to 28- 31% (from 31-33%).

Valuations. Consequently, we reduce our TP by 2% to RM5.90 (from RM6.03) also to reflect the rolling forward of our valuation base year to FY25F (from FY24F). The basis of our TP 15x FY25F 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. We expect consumer sentiment to gradually improve during the year as and when more clarity emerges over subsidy rationalisation, especially in relation to RON95. Once put in place, consumers will gradually “come to terms” with it and resume spending in accordance with what they can afford. A gradual pick-up in the local economy and job market in-line with the recovery in the global economy will also help.

The expanding domestic OTC market should also augur well for KOTRA. 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 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-thanexpected commercial operation of the new lab.

Source: Kenanga Research - 22 Feb 2024