KEY INVESTMENT HIGHLIGHTS

• Pharmaniaga’s 3QFY20 earnings dipped to RM1.1m from reduced demand from concession and Indonesia businesses
• Earnings was supported by lower operating expenditure during the quarter
• Earnings continues to be impacted by limited access to healthcare facilities following enforcement of RMCO
• Third interim dividend of 1.5sen declared
• FY20F earnings revised down by -30.0% to RM55.3m
• Maintain NEUTRAL with unchanged TP of RM4.74/share

3QFY20 earnings boosted by sales of PPE. Pharmaniaga’s 3QFY20 earnings came in at RM1.1m. This brought its 9MFY20 cumulative earnings to RM32.8m which was below ours and consensus’ FY20 earnings estimates at 41.8% and 45.3% respectively. During the quarter, revenue dipped by -12.8%yoy to RM624.8m primarily attributable to reduced demand from both its concession business and Indonesian business due to Covid-19 pandemic. That said, earnings grew by >100%yoy to RM1.1m during the quarter due to the better revenue recognition. On a quarterly sequential basis; revenue declined marginally by -3.2%qoq whilst earnings dipped by - 88.5%qoq due to continued limited access to hospitals, doctors and pharmacies following the enforcement of the recovery movement control order (RMCO) during the quarter.

Logistics & Distribution (L&D). The segment revenue declined by -14.4%yoy in 3QFY20 to RM440.5m whilst segment EBIT surged by +163.7%yoy primarily driven by its non-concession business following increased sales in PPE. During the quarter, the segment’s EBITDA margin also declined marginally to 3.4% in 3QFY20 vs 4.3% in 3QFY19 attributable following the lower revenue recorded during the quarter.

Manufacturing. Segment revenue declined by -17.1%yoy whilst its EBIT contracted by -79.9%yoy respectively in-line with the lower sales order from the government hospitals. This was also further exacerbated by the RMCO which has limited its access to nonGovernment healthcare facilities, doctors and pharmacies. Furthermore, we opine that the contraction is also caused by increased OPEX relating to its newly launched products as well as; the ongoing international expansion which has caused margins to decline.

Indonesia division remains in loss-making position. Pharmaniaga’s Indonesian division registered a lower revenue by -8.4%yoy during the quarter attributable to the limited access to healthcare facilities in Indonesia following the implementation of its Pembatasan Sosial Berskala Besar (PSBB). Furthermore, the division reported a -17.8% decline yearover-year at the EBIT level due to the continued delay in payment by government hospitals in Indonesia which is currently affecting the healthcare industry in that country.

Third interim dividend of 1.5sen declared. In-line with its performance during the quarter, Pharmaniaga has declared a third interim dividend of 1.5sen for the quarter under review. This brings its 9MFY20 dividend declared to 10.0sen which is below our FY20F dividend forecast of 16.8sen. That said, the 10.0sen dividend declared is higher than the dividend declared during the same period last year of 8.5sen following an overall improvement in earnings in FY20. The 9MFY20 dividend declared represents a payout ratio of 79.4% of its 9MFY20 EPS of 12.6sen and translates to an annualised yield of 2.3% to yesterday’s closing price of RM5.72.

FY20F earnings revised down following enforcement of CMCO nationwide. We are revising our FY20F by -30.0% to RM55.3m as we opine that the enforcement of conditional movement control order (CMCO) in 4QFY20 to impact revenue given the restriction of movement of its sales staff and delayed product delivery expected during the period. Consequently, we have also revised our FY20F dividend expectation to 11.7sen following the revision in FY20F earnings. However, we are making no changes to our FY21F earnings estimate at this juncture pending its analyst briefing which is to be held this morning.

Target price. We are maintaining our target price at RM4.74 per share for now. Our TP is derived via pegging our FY21F EPS of 31.6sen to a revised target PER of 15.0x which is the average of its historical five-year rolling PER

Maintain NEUTRAL. All things considered, we are maintaining our NEUTRAL recommendation on Pharmaniaga considering that the company will remain susceptible to the enforcement of Covid-19 pandemic movement restriction which will limits its accessibility to healthcare facilities nationwide and in Indonesia. With the resurgence of new cases in several countries that have eased their respective Covid-19 measures and in Malaysia, the fight remains to this very day given that number of newly infected cases is higher than before. The announcement on the potential vaccine availability next year have been well-received and we opine that should it come into production and usage next year, it will help to alleviate the volatility in Pharmaniaga’s demand outlook.

That said, going forward we opine that Pharmaniaga’s revenue will continue to be insulated – to a certain degree, by its position as one the few industry players that have the capability to manufacture as well as; distribute medical drugs and pharmaceutical products nationwide owing to its extensive network of logistics. Also, it has a decent FY21F dividend yield of 3.0%.

Source: MIDF Research - 20 Nov 2020