Investment Merits

• Fundamental changes in business strategy and revival of its  branding in recent years to underpin sales growth moving forward

• Largest generic drug maker by market cap in Malaysia

• Beneficiary of the pick-up in patient volumes at local hospitals

• Disposal of Straits Apex Group (SAG) is valuation-accretive, and at  the same time, demonstrates management’s capability to unlock  long-term shareholder value

Company Profile

Apex Healthcare (AHEALTH) is Malaysia’s largest generic drug  manufacturer with an established presence in the domestic market,  Singapore, and other countries. The group, via its 100%-owned  subsidiary Xepa-Soul Pattinson, manufactures and distributes various  forms of drugs to private hospitals, clinics and pharmacies. Its 40%- owned associate Straits Apex is engaged in the contract manufacturing  of orthopedic devices, components, and surgical instruments for global  multinational companies.

Highlights

Beneficiary of the pick-up in patient volumes. As the nation emerged  from the movement restrictions in Apr 2022, business activities in the  healthcare services industry started seeing a swift recovery. Key  operating metrics (eg bed occupancy rates, and patient visits) across  private healthcare service providers have collectively recovered to preCOVID-19 levels. The spillover effect is benefiting generic drug makers  as well, and this provides AHEALTH near-term earnings visibility. The  reopening of international borders also continues to boost sales of  orthopedic devices and surgical instruments for its 40%-owned  associate company Straits Apex, as foreign customers seek to divert  their orders to South-East Asian original equipment manufacturers  (OEM) due to the temporary closure of small OEMs in Europe amid  rising production costs.

Capacity-driven growth outlook. We expect further upside to be  supported by utilisation rate improvements at its new oral solid dosage  manufacturing plant – SPP NOVO. The production facility has a floor  space of 19,406sq ft, which is 3x larger than its previous production  capacity. The plant has space to fit up to six production lines, which  could sustain the group’s growth for at least 7-8 years. Notably, the  group has so far fitted only two production lines (as at Dec 2022) while  registering 14% revenue growth in 2022. We expect the growing  demand for oral solid dosage medicine – mainly for chronic and noncommunicable diseases such as cardiovascular and gastrointestinal  disorders – to fuel AHEALTH’s medium-term growth outlook, while also  sustaining its market leadership and position as the largest generic drug  manufacturer for the private sector.

Prospects underpinned by industry’s long-term landscape. Malaysia’s private healthcare spending enjoyed a healthy CAGR of  4.2% over 2018-2021 (vs AHEALTH’s 5.7%), according to the Ministry  of Health. We expect private healthcare spending to continue to chart  sustainable growth underpinned by: i) The ageing population (people  aged 65 years and above made up >7% of total population in 2022)  given the lower mortality rates and longer life expectancy, ii)  technological advances enabling increased healthcare awareness and  education (further accelerated by the pandemic), and iii) gradual  increase in healthcare expenditure (2018-2021 CAGR of 13.1%).

Divestment of SAG. AHEALTH, on 28 Apr, announced the proposed  divestment of SAG to healthcare-focused private equity firm Quadria  Capital at an enterprise value of USD240m. Assuming negative net debt  and working capital adjustment of USD25m, AHEALTH is set to pocket  USD25m (or MYR110m) for its 40% interest in SAG. The disposal  valuation EV/EBITDA of 16.7x is deemed valuation accretive, given  AHEALTH’s 5-year historical mean of 13x. Post divestment,  AHEALTH’s effective stake is expected to be lowered to 16% from 40%.

Company Report Card

Latest highlights. AHEALTH reported record-high net earnings of  MYR101m aided by higher revenue from third-party and in-house  brands. It also benefited from a pick-up in export sales (+32% YoY) post  the reopening of international borders. Its associate Straits Apex also  benefited from the clearance of backlog orders in 2022 and new sales.  Separately, the group proposed a 1-for-2 bonus issue to increase  trading liquidity. The bonus issue is expected to be completed by 2Q23.

Balance sheet. AHEALTH has total borrowings of MYR9.5m as at 2022  with a cash balance of MYR174.6m. The company’s net cash position  has been increasing steadily on par with its earnings growth as a result  of: i) Healthy topline performance and ii) gradual paying down of loans  associated with the construction of SPP Novo.

Dividends. The company has been consistently rewarding  shareholders with cash dividends (30-40% payout ratio) for over 10  consecutive years. It does not have an official dividend policy.

Management. AHEALTH is steered by a group of experienced industry  professionals with >20 years of experience in the healthcare and  pharmaceutical industries prior to the founding of the company. Group  founder, Chairman and CEO Dr Kee Kirk Chin has led the company  since appointed as Group MD in Feb 2000.

Investment Case

We expect AHEALTH’s earnings to continue to be anchored by demand  for medicine, as: i) Pharmaceutical sales are typically non-cyclical in  nature, ii) growth visibility stemming from demand for orthopaedic and  surgical equipment as global customers seek to diversify their global  supply base, and iii) steady drug procurement outlook as patient visits  continue to chart healthy growth post pandemic. We value the stock  based on SOTP, which implies 23x FY24F P/E. The valuation is 1SD  above its historical mean, given its better earnings visibility and capacity  driven growth outlook that offers a defensive spot for investors seeking  defensive assets.

Source: RHB Securities Research - 16 May 2023