INVESTMENT HIGHLIGHTS

• 1HFY19 earnings came in at RM28.9m (+25.8%yoy), which exceed our expectation

• The logistics and distribution division recorded stronger performance driven by better contributions from the nonconcession business

• Declared an interim dividend of 2.5sen per share

• Maintain BUY with a revised TP of RM2.95 per share

Double digit earnings growth. Pharmaniaga’s 2QFY19 earnings came in at RM9.3m. This brings it 1HFY19 earnings to RM28.9m which exceeds ours but met consensus earnings estimates at 59.8% and 52.4% respectively. The 1HFY19 revenue and earnings rose by +15.6%yoy and +25.8%yoy respectively driven by logistic and distribution (L&D) division.

Solid performance by L&D division. Pharmaniaga’s L&D division’s revenue and operating profit for 1HFY19 registered a growth of +13.5%yoy (RM989.3m) and +63.7%yoy (RM28.4m) respectively. The improved performance was driven by better contributions from the nonconcession business. This was further compounded by the lower effective tax rate which reduced to 27.1% in the 1HFY19 (vs 40.2% in the 1HFY18). Nonetheless, due the lower contribution from the concession business, manufacturing division’s 1HFY19 operating profit has declined by -19.3%yoy to RM29.1m. Meanwhile, Indonesian operation recorded a commendable performance for the 1HFY19 with operating profit growth of +32.7%yoy to RM8.3m.

Second interim dividend declared. Pharmaniaga declared a second interim dividend of 2.5sen per share (vs 2QFY18: 4.0sen) for the quarter under review. This brings the cumulative dividend declared so far to 8.5sen per share (vs 1HFY18: 9.0sen).

Impact to earnings. We are revising our FY19F and FY20F earnings forecast upwards by +5.6% and +7.7% to take into account the: (i) improved performance of the non-concession business and; (ii) lower effective tax rate.

Target price. We are revising our target price to RM2.95 (previously RM2.74) per share. This is premised on pegging revised FY20F EPS of 21.1sen to target PER of 14.0x which is the average of its historical two-year rolling PER.

Maintain BUY. Pharmaniaga’s 10-year concession agreement with the government is slated to end in November 2019. There is a mounting concern on a non-renewal of the concession agreement contract as Pharmaniaga is viewed to be having monopolistic position. Nevertheless, we believe that there is a fair chance that the concession business will still be awarded to the company given: (i) its years of experience and expertise in the logistics and distribution business; (ii) the huge amount of investment to ensure efficient deliveries and; (iii) the massive savings enjoyed by MOH from Pharmaniaga’s handling capability. We estimate that it will take up at least four years for other competitors to reach the same capability. In addition, the group has renewed its focus on its non-concession business by strengthening business synergies between its Indonesian subsidiaries to expand its presence in the Indonesian market which has led to an improved performance during the quarter. We expect these will to help support group’s earnings going forward. In addition, the stock commands an attractive dividend of more than six percent in comparison with its peers. All things considered, we maintain our BUY on the stock.

Source: MIDF Research - 26 Aug 2019