• BUY, new MYR1.88 TP from MYR1.84, 16% upside. Duopharma Biotech should benefit from a pick-up in orders from the public and private sectors, as drug procurement resumed following the full relaxation of movement restrictions in Apr 2022. A potential wildcard is a sudden spike in orders amid concerns of a raw material shortage from China. Valuation is undemanding at a 0.2SD discount against its historical mean, vs KL Healthcare Index’s +0.9SD from the mean. We incorporate a 2% ESG discount to the intrinsic value.

• 4Q22 preview. DBB stands to benefit from healthy order replenishment from the public and private sectors, as the local hospital bed utilisation rate recovered to above pre-pandemic levels – thanks to the return of patients post full relaxation of movement restrictions. A potential wildcard is a sudden spike in orders amid concerns of a raw material shortage from China. On the flip side, the consumer healthcare segment’s growth could taper off in 4Q22 due to a high-base effect before normalising to c.6% in 2023.

• Eyeing M&As for growth opportunities in 2023 as the group aims to expand its market share in the generic drug manufacturing industry. DBB has seen positive synergies from its investments: i) It entered into a product distribution agreement to distribute a range of anti-hair loss products (via investment into SCM Lifescience), ii) its AZTherapies (AZT) investment is set to facilitate low- cost entry access to the marketing and manufacturing of a novel product for Alzheimer’s, now pending the bridging trial results by 4Q22/1Q23. AZT expects to commence talks with the US Food & Drug Administration to fast-track approvals within the next 12 months, post trial results.

• Approved product purchase list (APPL) contract. Following the recent medical supply concession contract extension by the Health Ministry to Pharmaniaga, we believe DBB’s APPL contract extension with the ministry could be finalised before 1H23. We think there is a possibility of contract rollover rather than finalisation of a new concession agreement. As such, DBB may eventually have to bear with procurement rates still based on the USD/MYR rate of 4.20, from when the contract was entered back in 2017.

• Earnings adjustment. We maintain our 2022 earnings estimates, but raise our 2023 estimate by 3%, taking into account the potential pick-up in order replenishments by customers amid concerns of drug shortages.

• BUY, higher TP. We ascribed a 2% ESG discount to our intrinsic value to derive our new TP. Our TP implies 19x FY23 P/E or 17x P/E based on FY6/24 vs Kotra Industries’ (KTRI MK, BUY, TP: MYR7.07) FY24F (Jun) 15x P/E, in view of DBB’s higher exposure towards the generic drug segment which continues to enjoy robust demand from the public and private sectors, as opposed to the normalised growth outlook for the consumer healthcare segment in 4Q22.

Source: RHB Research - 6 Jan 2023