INVESTMENT HIGHLIGHTS

• Holds a monopoly on government concession business

• Manufacturing as the future earnings driver

• Increasing revenue contribution from Indonesia expected

• Earnings to be driven by all segments

• Initiate with BUY with TP of RM5.80 per share

Monopolise the government concession business. Pharmaniaga has a 100% market share of the government concession business of MYR1.2bn. This Concession Agreement enables the company to supply and distribute pharmaceutical products to medical institutions under the Ministry of Health (MOH) via its logistics and distribution division until 2019.

Manufacturing as the future earnings driver. Pharmaniaga’s earnings in the manufacturing division rely on the development and launch of new products. We see high growth potential in the segment for its: (i) better quality high margin pharmaceutical products; (ii) 200 new products in the pipeline for the next ten years; and (iii) capacity expansion – management guided that they are adding high volume capacity equipment as they foresee healthcare spending to escalate.

Increasing contribution from Indonesia expected. Pharmaniaga’s Indonesian operation contributes 23% to the group’s total FY15 revenue. Going forward, we think that Pharmaniaga will benefit from both its network of 29 branches across the country and also from Indonesia’s large population of 255m.

Earnings to be driven by all segments. We project a FY17-18F net profit growth of +24.5% and +14.3% respectively, premised on: (i) expectation of increase in supply order from the government; (ii) increased contribution from its Indonesian operation and; (iii) new generic drugs introduced to the market.

Initiate coverage with BUY with TP of RM5.80. We initiate coverage on Pharmaniaga with a BUY recommendation and TP of RM5.80. Our TP is derived via pegging our FY17F EPS of 29sen to FY17F 20x.

VALUATION

Target Price. We are valuing Pharmaniaga with a target price (TP) of RM5.80 per share. Our TP is derived by pegging our FY17F EPS of 29sen to FY17 forward PER of 20x.

Initiate with BUY. Notwithstanding the current year’s dip in earnings, we believe that going forward Pharmaniaga’s earnings will be buoyed by the: (i) RM4.5b budget allocation for medicines by the Government announced in the recent Budget 2017; (ii) higher contribution from Indonesia as well as; (iii) potential introduction of new generic drugs into the market. All factors considered, we are initiating our coverage on Pharmaniaga with a BUY recommendation.

Source: MIDF Research - 22 Dec 2016