PHARMA’s FY23 results disappointed, registering a net loss of RM77.5m on write-off of inventories, product development costs and machinery. Pending approval of its regularisation plan to lift it out of the Practice Note 17 (PN17) status, we maintain our forecasts, TP of RM0.31 and UNDERPERFORM call.

PHARMA reported a FY23 net loss of RM77.5m against our full-year net loss forecast of RM41m and the full-year consensus net loss of RM6m. The variance against our forecast came largely from the write-off of inventories. No dividend was declared in this quarter which was within our expectation.

YoY, its FY23 revenue fell 2% due to lower sales at its medical supply unit (-5%) but negated by a better showing from its Indonesia operation (+6%). However, its FY23 dipped into a net loss of RM77.5m, having written off: (i) slow-moving expiring inventories namely personal protective equipment and needles (RM65m), (ii) product development costs (RM13m) due to the non-commercial viability of the products, and (ii) machinery (RM13m).

QoQ, its 4QFY23 losses narrowed to RM33m compared to RM49m in 3QFY23 as the performance of its medical supply unit bottomed out.

Outlook. We project pedestrian earnings growth in FY24 at level similar to pre-Covid era, averaging RM40m−RM60m driven by regular orders for medical supplies from the MoH concession. We remain cautious on PHARMA due to the negative shareholders’ equity of RM296m as at 31 Dec 2023 impeding its ability to give out dividends. Looking ahead, 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. 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.

Forecasts. We maintain our FY24F forecasts and introduce our FY25F numbers.

Valuations. Likewise, we 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 4). 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 - 1 Mar 2024