PHARMA’s 1QFY24 results beat our forecast. Its 1QFY24 core net profit jumped almost 10-fold on improved sales, efficiency gains and cessation of non-core units. We raise our FY24-25F net profit forecasts by 13% and 5%, respectively, lift our TP by 9% to RM0.34 (from RM0.31) but maintain our UNDERPERFORM call. The stock remains under Practice Note 17 (PN17) status.

PHARMA’s 1QFY24 net profit of RM25.6m (>100% YoY) beat our expectation at 55% of our full-year forecast. Consensus estimate is unavailable. The variance against our forecast came largely from higher-than-expected sales. No dividend was declared in this quarter which is within our expectation.

YoY, its 1QFY24 revenue rose 10% due to higher sales from its Indonesia operation (+32%) and medical supply unit (+2%), which more than offset poorer showing from generic drugs (-31%). Its 1QFY24 core net profit jumped almost 10-fold, thanks to operational efficiency gains through on-going inventory optimisation efforts, cessation of non-core and non-performing businesses and a lower effective tax rate.

QoQ, its 1QFY24 revenue jumped 22% due to higher sales from its medical supply unit (+34%) as orders from MOH picked up following a slow 4QFY23, which more than offset weaker showing from generic drugs (-13%). It returned to the black in 1QFY24 from a loss in 4QFY23 (due to the write-off of slow-moving expiring inventories namely personal protective equipment and needles and product development costs due to the non-commercial viability of the products).

Outlook. We remain cautious on PHARMA due to the negative shareholders’ equity of RM272m as at 31 Mar 2024 impeding its ability to distribute any dividend. 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.

Forecasts. We raise our FY24-25F net profit forecasts by 13% and 5%, respectively.

Valuations. Likewise, we raise our TP by 9% to RM0.34 (from RM0.31) also to reflect the rolling forward of our valuation base year to FY25F (from FY24F). The basis of our TP of 10x FY25F EPS is 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 - 28 May 2024