INVESTMENT HIGHLIGHTS

• 9MFY18 earnings of RM38.0m (+18.4%yoy) came in above our expectation

• Higher contribution from the concession business boosted the logistics and distribution segment

• Profit margin improves beyond two percent driven by the cost optimisation efforts

• Declared a second interim dividend of five sen, bringing cumulative 9MFY18 dividend to 14sen

• Maintain NEUTRAL with revised TP of RM3.15 per share

9MFY18 earnings above our estimate. Pharmaniaga’s accumulated 9MFY18 earnings came in at RM38.0m which above ours but lagged consensus earnings estimates at 81.5% and 62.6% respectively. The 9MFY18 revenue for the rose modestly by +4.5%yoy while earnings grew at a faster pace of +18.4%yoy.

Commendable revenue growth. Pharmaniaga’s 9MFY18 higher revenue of RM1,788.3m (from RM1,710.8m in 9MFY17) was mainly due to the higher revenue contribution coming from the logistics and distribution (L&D) division. The L&D segment revenue contribution rose by +9.7%yoy mainly attributable to the stronger contributions from the concession business. This was partially mitigated by a lower revenue from its Indonesian division which dipped by -6.3%yoy in view of the depreciation of the Malaysian Ringgit against the Indonesian Rupiah.

Earnings boosted by lower operating expenses. Pharmaniaga recorded a jump in 9MFY18 earnings of +18.4%yoy mainly driven by a lower operating expense. The fall in operating expenses of -3.9%yoy was by the L&D division which reflects its efficiency in distributing pharmaceutical products to public hospitals in clinics in Malaysia. This lead to higher profit margin of 2.1% (9MFY17: 1.8%).

Third interim dividend declared. Pharmaniaga declared a third interim dividend of 5.0sen per share for the quarter under review. This brings its accumulated dividend for the year to 14.0sen.

Impact to earnings. Following the earnings announcement, we are revising our earnings forecasts for FY18F and FY19F to RM60.3m and RM65.4m respectively in-line with the management’s cost optimisation efforts. Key risk to our earnings forecasts would be: (i) non-renewal of government concession orders and; (ii) lower-than-expected cost reduction.

Target price. We revised our target price to RM3.15 (from RM3.00 per share previously) post earnings revision. This is premised on pegging FY19F EPS of 25.2sen to FY19F target PER of 12.5x which is -1.25SD lower than the average of its historical three-year rolling PER.

Maintain NEUTRAL. Since June 2018, the stock has been de-rated amidst concern over the non-renewal of its 10-year medical supplies concession agreements with the government which is slated to end in November 2019. While it is still uncertain whether the new government will renew its contract, we take comfort that the management is now focusing on cost optimisation efforts. We expect that this will result in further cost savings and hence, could improve the group’s ability to offer a more competitive pricing to the government. In addition, the group will continue its focus on strengthening business synergies between its Indonesian subsidiaries to expand its presence in the Indonesian market. All things considered, we maintain our NEUTRAL call on the stock.

Source: MIDF Research - 21 Nov 2018