KOTRA's 1QFY25 results were hit by forex losses impacting its bottom line. Despite exports accounting for 30% of sale, its 1QFY25 topline rose 23% YoY and accelerated 10% QoQ, and we remain upbeat on KOTRA backed by recovering consumer spending, drawing encouragement from sales momentum. We maintain our forecasts and TP of RM5.35, reiterating our OUTPERFORM call. The stock offers a 6% dividend yield.

Its 1QFY25 net profit of RM10m came in at 19% of our, and consensus, full-year net profit forecasts. An interim dividend of 12.5 sen was declared which was within our expectation.

YoY, its 1QFY25 revenue rose 23%, we believe, as consumers flocked to the market driven by increased demand for pharmaceutical products in both the local and export markets. Its EBITDA fell by 13% due to forex losses (RM7.5m). Its 1QFY25 net profit declined by 29%, partly weighed down by a higher effective tax rate of 17% (due to expiry of tax incentive) vs. 1% in 1QFY24.

QoQ, its 1QFY25 turnover rose 10% due to higher local and export sales.

However, EBITDA and PBT fell 25% and 22%, respectively, due to forex losses. Net profit was cushioned by a lower higher effective tax rate of 17% compared to 26% in 4QFY24.

Outlook. We expect consumer sentiment to gradually improve over the course of FY25 once clarity emerges over subsidy rationalisation especially for RON95, and resumption of spending behaviour after an initial adjustment period. For now, a 7%-15% hike in the salary of civil servants from Dec 2024, and a gradual pick-up in the local economy and job market in line with the recovery in the global economy is providing support.

Meanwhile, the expanding domestic OTC market should also augur well for KOTRA (its OTC products account for 50% of its top line). The out- of-pocket healthcare spending in Malaysia at private pharmacies has grown at a 10-year CAGR of 11%.

Valuations. We maintain our forecasts, TP of RM5.35 based on 15x FY25F EPS, in line with its peer average. 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 continue to like KOTRA for: (i) the bright prospects of the over-the-counter (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 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-than-expected commercial operation of the new lab.

Source: Kenanga Research - 28 Nov 2024