• Keep BUY and DCF-derived MYR1.75 TP, 25% upside and c.2% yield. 1Q23 results were above our and Street’s expectation, as the resilient patients footfalls in the public and private hospital segments drove higher prescription pharmaceutical products sales. Going forward, we believe Duopharma Biotech’s earnings will continue to be underpinned by robust drug procurement, in-elastic consumer demand towards healthcare products, and potential synergies generated from its investee companies. Our TP incorporates a 5% ESG discount into our intrinsic value.

• Results overview. DBB booked a 1Q23 core profit of MYR28.3m (+6.5% QoQ, -4% YoY) that accounted for 30% and 29% of our and Street’s full- year estimates. We deem the results as above expectations, aided by the 16% YoY export sales pick-up (+45% QoQ) that benefited from reopening international borders. The local sales segment saw a resilient 6% YoY growth, likely driven by sustained drugs procurement demand from the public and private sectors. On a sequential basis, the local sales segment was 33% QoQ better than in 4Q22 on seasonality effects in conjunction with the Health Ministry’s accounts closing period towards year’s end.

• Margin overview. 1Q23 GPM held up at 41.2%, expanding 0.4ppts YoY from 40.2% – likely driven by a better product mix (gradual improvements in private sales over public ones) and timely ASP adjustments to counter the impact of a weakening MYR against the USD. All in, DBB’s 1Q23 EBITDA margin was largely stable at 19.6%.

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

• Maintain BUY and MYR1.75 TP. We incorporated a 5% ESG discount to our TP based on our proprietary methodology, as DBB’s ESG score is below the country median. The stock currently trades at a 12-month forward P/E of 14x, 0.6SD below its 5-year mean of 17x. We deem this as unjustified, given DBB’s better than peers’ margins profile, long-term growth potential from its investment in higher-value products (eg oncology), and synergies generated from its investee companies.

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

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a 50% weightage to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research for details. After incorporating this latest framework, we derive a lower 2.75 ESG score from the prior 2.89. Hence, our ESG discount is raised to 5% from 2% previously.

Source: RHB Research - 23 May 2023