INVESTMENT HIGHLIGHTS

• 1QFY17 earnings within estimates

• Improved contribution from government concession business

• Lower operating costs boosted PBT

• Declared a first interim dividend of 4.0sen

• Maintain NEUTRAL with revised TP of RM5.19 per share

1Q17 earnings within estimates. Pharmaniaga’s 1QFY17 earnings came in at RM18.9m which is within our and consensus estimates. Revenue and earnings improved by +10.6% and +3.0% on year-overyear basis respectively while on a quarterly sequential basis, revenue increased by +6.0% and earnings more than doubled.

Improved contribution from government concession business.

In 1QFY17, Pharmaniaga’s improved revenue of RM618.3m (from RM559.2mm in 1QFY16) was mainly due to increased orders from the government concession business. In addition, the higher revenue recorded during the quarter was also due to the double digit growth in orders from the private sector under the Logistics and Distribution segment. Furthermore, we note that the revenue contribution from its Indonesian operation grew by +15.1%yoy to RM177m (from RM153.8m in 1QFY16) attributable to its production rationalisation exercise.

Lower operating costs boosted PBT. During the quarter, Pharmaniaga’s PBT also grew by +4.7%yoy to RM28m (from RM26m on 1QFY16). This was mainly due to: (i) reduced finance costs; (ii) lower amortisation cost for Pharmacy Information System (PhIS) and; (iii) better revenue contribution from all business segments. Its Indonesian operation has also achieved a PBT of RM0.9mm, a turnaround from –RM1.0m last year which is a result of product rationalisation exercise and reduced finance costs. Meanwhile, its manufacturing division saw a decline of -3.7%yoy at the PBT level due to a lower offtake for in-house products under the concession business.

Declared a first interim dividend of 4.0sen. In line with its improved performance during the quarter, Pharmaniaga declared a first interim dividend of 4.0sen per share for the quarter under review. This translates to an annualised yield of 3.4% to yesterday’s closing price. This also represents a payout ratio of 54.8%.

Earnings forecasts maintained. Following the earnings announcement, we are making no changes to our earnings forecasts at this juncture as we believe Pharmaniaga is on track to meet our earnings projections. Key risks to our earnings forecasts would be: (i) better or lower than expected government concession orders and; (ii) better than expected cost reduction.

Maintain NEUTRAL with a revised TP of RM5.19. All in, we are maintaining our NEUTRAL recommendation on with a revised TP of RM5.19 after we roll forward our valuation base year to FY18. Our TP is derived via pegging our FY18F EPS of 30sen to 17.3x FY18F forward PER which is the average of its historical five-year rolling PER. We think this is fair, given that we believe that it will continue to be challenging for its concession business in the near term given that the government is trying to avoid wastage in its procurement system and therefore will be cautious in its procurement of drugs and medical supplies going forward. That said, we take comfort in the fact that both its private sector business as well as Indonesian operation have been contributing well to the group’s overall revenue which we think will bode well for the company in terms of future earnings contribution.

Source: MIDF Research - 17 May 2017