INVESTMENT HIGHLIGHTS

• 4QFY16 earnings below estimates

• Lower revenue from government concession a drag on earnings

• Declared a fourth interim dividend of 3.0sen

• FY17F earnings forecast reduced by -11.7%

• Downgrade to NEUTRAL with reduced TP of RM5.20

4QFY16 earnings below estimates. Pharmaniaga’s 4QFY16 dipped into the red at –RM0.836m. This brings its FY16 full-year earnings to RM45.6m which is below our and consensus estimates. Revenue and earnings were down by -14.3% and by more than >100% on yearover-year basis respectively, while on a quarterly sequential basis, revenue increased by +13.1% and earnings slumped by over >100%.

Lower revenue from concession a drag on earnings. In 4QFY16, Pharmaniaga’s lower year-over-year revenue of RM582.8m (vs RM680.2m in 4QFY15) was mainly due to reduced orders from the government concession business. In addition, Pharmaniaga also incurred higher operating costs especially in terms of financing costs as well as selling and distribution costs. Meanwhile, its manufacturing division saw a decline of -15% at the PBT level due to a lower offtake for in-house products under the concession business.

Declared a fourth interim dividend of 3.0sen. Despite the lacklustre financial performance throughout the year, Pharmaniaga declared a fourth interim dividend of 3.0sen per share for the quarter under review. This brings the total dividend declared to date to 16.0sen, representing a current dividend yield of 3.2%. The total dividend declared also represents a payout ratio of 91% for FY16.

FY17F earnings forecast reduced by -11.7%. Following the FY16 earnings announcement, we reduced our FY17F earnings by -11.7% to RM66.9m as we factor in a more challenging operating environment especially on its logistics and distribution business due to a more cautious procurement activity by the government in its effort to combat wastage. In addition, we are also introducing our FY18F numbers in this report.

Source: MIDF Research - 22 Feb 2017