• Keep BUY and DCF-derived TP of MYR1.88, 13.7% upside. Duopharma’s 2022 results were above our and Street’s expectations, underpinned by higher sales of prescription pharmaceutical products and resilient public health sector demand. We expect earnings growth to be underpinned by robust drug procurement, inelastic consumer demand towards healthcare products, and potential synergies from investee companies. Our TP incorporates a 2% ESG discount to intrinsic value.

• Results overview. 4Q22 delivered core earnings of MYR26.6m, which grew 42% YoY to bring 2022 core earnings to MYR111m, 19% and 23% above our and consensus’ full-year estimates. Our 2022 core earnings had taken into consideration MYR40.4m impairment of inventories, as well as other one-off losses. DBB’s stronger-than-expected 4Q22 performance was mainly driven by export sales recovery (+31% YoY) from the reopening of international borders. Meanwhile, the local sales segment saw resilient growth (+3% YoY), likely driven by sustained drugs procurement demand from both public and private sectors. On a sequential basis, the local sales segment was -13% QoQ due to seasonality effects in conjunction with the Health Ministry’s account closing period.

• Margin overview. The company’s 4Q22 GPM held up at 41.3%, expanding 1.1ppts YoY from 40.2%. This was likely driven by a better product mix and timely ASP adjustment to counter the weakening MYR against the USD. All in, its EBITDA margin grew slightly to 18% in 4Q22 from 17.8% in 4Q21.

• Approved products purchase list contract extension in late January was in line with Street’s expectation. We are neutral on the news, as DBB’s contract extension (ended Jun 2023) remains unfavourable, given the procurement rate of USD/MYR 4.2-4.3 entered back in 2017.

• We make no changes to our earnings estimates at this juncture, as we expect to get better clarity on the company’s outlook, as well as updates after the analyst briefing.

• Maintain BUY and TP of MYR1.88. We incorporated a 2% discount to our TP as – based on our proprietary methodology – DBB’s ESG score is below the country median. The stock is currently trading at 14x 12-months forward PE, 0.5SD below its 5-year mean. We deem this as unjustified, given its better-than-peers margin profile, long-term growth potential from its investment into higher-value products such as oncology, and synergies generated from its investee companies.

• Key risks. Lower-than-expected volumes sold and depreciation of MYR against the USD.

Source: RHB Research - 24 Feb 2023