PHARMA guided for sustained profitability (after an earnings spike in 1QFY24) with moderate orders for medical supplies under the concession, impact from a price hike in 1QFY24 and better inventory management. We maintain our forecasts, TP of RM0.34 and UNDERPERFORM call. The stock remains under Practice Note 17 (PN17) status.

We came away from PHARMA’s post-1QFY24 results briefing feeling cautious. The key takeaways are as follows:

1. PHARMA guided for orders to moderate at its medical supply unit in subsequent quarters following a strong uptick in 1QFY24 (which we have factored into our forecasts). It shed light to the good set of results. To recap, its 1QFY24 core net profit jumped almost 10- fold to RM25.6m on improved revenue (+10% YoY), efficiency gains and cessation of non-core units. Specifically, we understand that the increase in 1QFY24 revenue (+10%) was driven by a higher sales volume (+3%) in medical supply unit to government hospitals, the addition of new products to the approved product price list (11 new SKUs) and higher prices (+5%) under the new concession. Separately, the revenue at its Indonesia operation grew 32% driven by higher demand for products from existing principals. Additionally, sales were generated from four new principals and the opening of two new branches in Feb 2024.

2. Its near-term profitability will be driven by: (i) closure of non-core and non-performing businesses involved in producing supplements and nutraceuticals products; and (ii) efficiency gain 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, which should reduce working capital requirements.

3. PHARMA is committed to innovation and product portfolio expansion. A case in point is, in the biopharmaceutical space, it is establishing manufacturing facilities for vaccines and insulin to cope with the increasing needs in these therapeutic areas. It will produce Recombinant Human Insulin and Analogue Insulin. Its insulin project is progressing steadily, with dossier submission in Feb 2024 and technology transfer slated for Jun 2024 and target commercialisation in mid-2025. For the vaccine project, the media fill or process simulation is expected to be completed by Sep2024 with the initiation of process validation batch in Dec2024.

Forecasts. Maintained.

Valuations. We also maintain our TP of RM0.34 based on 10x FY25F 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).

Investment case. 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. Reiterate UNDERPERFORM.

Key risks to our call include: (i) it bagging more concessions from the government, (ii) its PN17 regularisation plan being less dilutive to existingshareholders, and (iii) privatisation at a significant premium to the current market price.

Source: Kenanga Research - 29 May 2024