• Reiterate BUY, new MYR1.84 TP from MYR1.64, 32% upside. We think Duopharma Biotech is poised to benefit from the resilient consumer demand for healthcare and supplement products while picking up orders from the public and private sectors. This is as drug procurements resume post full relaxation of the MCOs in April. Its valuation is undemanding at 0.5SD below its historical mean vs the Kuala Lumpur Healthcare index’s +0.8SD above mean. We include a 2% ESG discount to our intrinsic value.

• Key takeaways. The post-earnings briefing suggests 3Q22 drug restocking from the local private and public sectors exhibited robust demand. This is amidst normalised revenue trends in the consumer healthcare segment, given the high base effect. DBB is currently eyeing M&A by next year, as it looks to expand its market share in the generic drug manufacturing industry. The group has also seen positive synergies from its investments: i) It entered into a product distribution agreement to distribute a range of anti- hair loss products via its investments in SCM Lifescience and ii) the AZTherapies investment is set to facilitate low-cost entry access to the marketing and manufacturing of a novel product for Alzheimer’s, which is pending US Food & Drug Administration approval by 4Q22/1Q23.

• Raw materials price normalisation. Active pharmaceutical ingredients (API) – a major raw material component (accounting for 50-60% of total production costs) – have begun to stage a declining trend over the last three months. At this time, DBB has sufficient API on hand to cater for demand, guiding that the pressing issue of raw material shortages has dissipated. Other teething issues, eg labour shortages, have also begun to normalise.

• DBB’s approved product purchase list (APPL) contract with the Health Ministry is due for an extension on 31 Dec. To date, it has yet to receive a response from the ministry, but we expect the contract to be extended by 6-12 months. We do not rule out the possibility that DBB may eventually have to bear with the contract terms should the procurement rate still be based on the 4.20 USD/MYR rate, ie when the contract was entered into in 2017. We estimate APPL to account for 18% of revenue in 2023.

• We raise our FY22F-23F earnings by 15% and 7%, taking into account of a stronger than expected ethical classic and specialty sales.

• Reiterate BUY with a higher MYR1.84 TP. We ascribed 2% ESG discount to our intrinsic value to derive our new TP, which implies 19x FY23F P/E, ie 0.3SD above its historical mean. DBB currently trades at -0.5SD below mean vs the Kuala Lumpur Healthcare Index’s +0.8SD above mean. We believe the group still commands a premium over its peer, given its strong presence in the local consumer healthcare offerings segment and better- than-peer margins.

Source: RHB Research - 16 Nov 2022