INVESTMENT HIGHLIGHTS

• 2QFY18 earnings lagged estimates

• Increased in revenue contribution from L&D

• Operating profit dragged by high operating expenses & tax

• Declared a second interim dividend of 4.0sen

• Maintain NEUTRAL with revised TP of RM3.00 per share

2QFY18 earnings lagged estimates. Pharmaniaga’s 2QFY18 earnings came in at RM5.4m which lagged our and consensus earnings estimates at 42.6% and 37.8% respectively. Revenue for the quarter rose by +12.5%yoy but earnings declined by -43.8%yoy on a yearover-year basis respectively.

Increased in revenue contribution from L&D. In 2QFY18, Pharmaniaga’s higher revenue of RM582.7m (from RM518.0m in 2QFY17) was mainly due to the higher revenue contribution coming from logistic and distribution (L&D) division. The L&D segment revenue contribution rose by +21.3%yoy mainly attributable to the increase demand from government hospitals. This was partially mitigated by a lower revenue from its Indonesian division which dipped by -4.8%yoy. The reasons for the dipped were because of the depreciation of the Malaysian Ringgit against the Indonesian Rupiah and increased in finance costs.

High operating expenses and tax dragged operating profit. Despite the higher revenue during the quarter, Pharmaniaga recorded earnings of RM5.4m in 2QFY18 which is -43.8%yoy lower than 2QFY17’s earnings. This was mainly due to the decline in operating profit of L&D division by -45.9%yoy as operating expenses increased. This was due to the higher provision for stock obsolescence and receivables which increased by two-fold and five-fold respectively. Meanwhile, effective tax rate rose to 43.3% in 2QFY18 from 29.4% in the previous year corresponding quarter as a result of increased profitability of certain subsidiaries and non-deductible expenses.

Second interim dividend declared. Pharmaniaga declared a second interim dividend of 4.0sen per share for the quarter under review.

Source: MIDF Research - 20 Aug 2018