• BUY, new MYR1.59 TP from MYR1.75, 14% upside. We expect Duopharma Biotech’s earnings growth to be buoyed by resilient drugs procurement from the public and private sectors amid softening consumer demand for healthcare and supplement products. Credit risk from Pharmaniaga’s (PHRM MK, NR) PN17 status is manageable as DBB continues to receive payments under its drugs supply contract. Valuations seem attractive, due to its ability to weather economy headwinds as demand for pharmaceutical products is expected to remain resilient.

• Key takeaways. We remain upbeat after attending DBB’s post-result briefings. Drug procurement activities stay robust despite a minor blip in April because of the longer holiday period. Demand for vitamin C and other immunity-boosting products are expected to normalise in 2023 as the nation enters the COVID-19 endemic phase – potentially decreasing DBB’s consumer healthcare (CHC) division sales. The product distribution with SCM Lifescience for IRORO brand halal-certified anti-hair loss products (expected launch in 3Q23), could cushion CHC ’s weakness.

• Cost. Although the active pharmaceutical ingredients’ price stabilised, the depreciation of MYR against USD remains a sticky challenge. We estimate every 1% appreciation of the USD could erode DBB’s earnings by 0.5%. We also expect the higher electricity tariff to weigh on its earnings by 1-2% (assuming electricity accounted for 5% of its total opex). Management believes it has the pricing power to pass on the costs to customers, as DBB maintained gross margin profiles of 40-41% over the past six years.

• Expansion plan. DBB’s latest high-tech oral solid dosage facility (K3) is scheduled to start operations in 2Q23. The facility would meet the growing demand for its generic products, while keeping it abreast with the current Good Manufacturing Practice guidelines as its existing K1 plant started in 1994. The group expects to incur additional MYR2-3m depreciation charges per annum once K3 is ready. A potential tax savings of MYR10m is expected to kick in by FY24F as K3 is categorised as a qualifying asset.

• Earnings adjustment. We lower our FY23/24 earnings estimate by 3-8%, taking into account higher electricity tariff as well as depreciation charges and other utilities expenses in relation to the commercialisation of K3 plant.

• Maintain BUY, with a lower TP of MYR1.59. We ascribed 4% ESG discount to our intrinsic value to derive our TP. Our TP implies 16x FY23 P/E, 0.2SD below its 5-year historical mean. We still like DBB, underpinned by its gradual increasing exposure towards the private sector, strong presence in the local CHC market, and better-than-peers’ margins profile.

Source: RHB Research - 30 May 2023