• 2QFY17 earnings within estimates

• Temporary closure of production lines a drag on earnings

• Improved PBT contribution across all segments

• Declared a second interim dividend of 4.0sen

• Maintain NEUTRAL with revised TP of RM4.66

2QFY17 earnings within estimates. Pharmaniaga’s 2QFY17 earnings came in at RM9.5m. This brings its 1HFY17 earnings to RM28.4m which is within our and consensus earnings estimates at 46%. Revenue and earnings declined by -2.6% and -36.5% on a yearover-year basis respectively while on a quarterly sequential basis, revenue dropped by -16.2% and earnings dipped by -49.7%.

Temporary closure of production lines a drag on earnings. In 2QFY17, Pharmaniaga’s lower revenue of RM518m (from RM618.3mm in 1QFY17) was mainly due to moderate orders coming from the government concession business due to the fasting month and festive season which falls in 2QFY17. In addition, the lower revenue recorded during the quarter at RM10.2m (from RM21.5m in 2QFY16) was also due to the temporary closure of its production lines in Bangi for preparatory works and to facilitate the commercialisation of new products that were approved ahead of schedule. However, we understand from the management that the preparations are now completed and will not be affecting Pharmaniaga’s 3Q earnings.

Improved PBT contribution across all segments. Despite the lower revenue and earnings during the quarter due to the abovementioned reasons, Pharmaniaga still recorded RM1.1b of revenue in 1HFY17 which is on par with 1HFY16 revenue. Furthermore, Logistics and Distribution (L&D) segment delivered a higher PBT of RM4m for 1HFY17 from a deficit of -RM4m in the same period last year. In addition, its Indonesian division posted a PBT of RM1.5m – an improvement from a deficit -RM0.6m in 1HFY16. However, its manufacturing division registered a decline of -31%yoy at the PBT level due to lower production during the quarter.

Declared a second interim dividend of 4.0sen. Pharmaniaga declared a second interim dividend of 4.0sen per share for the quarter under review which brings its total dividend declared to date to 8.0sen. This translates to an annualised yield of 3.8% to yesterday’s closing price.

Earnings forecasts maintained. Following the earnings announcement, we are revising our earnings forecasts for FY18F by -9.0% as we anticipate that meaningful earnings recovery for Pharmaniaga will only be visible from 2HFY18 onwards. This is because most of its products that are currently pending registration are expected to be approved towards end-2017 and will only be making meaningful contribution from 2HFY18 onwards. 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 RM4.66. All in, we are maintaining our NEUTRAL recommendation on with a revised TP of RM4.66 (from RM5.19 per share previously) post earnings revision. Our TP is derived via pegging our FY18F EPS of 27sen to unchanged 17x FY18F forward PER which is in line with the average of its historical five-year rolling PER. We think this is fair, given that we believe that procurement of drugs and medical supplies going forward from the Ministry of Health will be moderate as it tries to manage the ballooning healthcare costs in the public hospitals. 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 Aug 2017