• Maintain BUY and DCF-derived TP of MYR1.59, 34% upside with c.3% FY23F yield. Duopharma Biotech’s 2Q23 results missed ours and Street’s estimates – its performance was dragged by softer demand for its consumer healthcare (CHC) products. Earnings ahead should still be underpinned by robust drug procurement from the public and private sectors, the renewal of the approved product purchase list (APPL), as well as potential synergies generated by investee companies. Our TP includes a 4% ESG discount on its intrinsic value, as DBB’s ESG score is below the country median.

• Results review. 2Q23 core earnings tumbled 50% YoY to MYR14.2m. This brought the 1H23 total to MYR42.6m (-27% YoY), which accounts for 47% and 43% of ours and Street’s full-year estimates. The weaker-than-expected results were due to sluggish performance from CHC division (-25 to -30% YoY) as consumer demand for health supplement products dissipated post COVID-19 pandemic. Export sales grew 34% YoY (+15% QoQ) benefited from the reopening of international borders. Meanwhile, domestic sales contracted by 10% YoY, likely dragged by a shorter tendering period from the procurement of APPL supply as the supply and delivery was done on a purchase order basis as opposed to as per an annual tendering period.

• Margin overview. DBB’s 2Q23 GPM expanded 1.4ppt YoY, likely driven by a better product mix (gradual improvement in private sales over public sales) as well as timely ASP adjustments done to counter the impact of the weakening MYR against the USD. Core profit margin contracted 7.3ppt YoY from incremental costs associated with the commencement of a new production facility.

• Cost outlook. Management thinks that a strengthening USD and rising electricity tariffs could pressure its bottom line. Nonetheless, active pharmaceutical ingredients (API) – a major raw material component (accounting for 50-60% of total production costs) – have continued to normalise over the past few months, which could potentially offset against the cost pressures mentioned above.

• 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 its analyst briefing.

• DBB is trading at an attractive 10.4x FY24F P/E, or 0.7SD below its 5-year mean of 17x. 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 biosimilar products – ERYSAA®, a halal certified erythropoietin (EPO) which treats anaemia in patients with chronic kidney diseases.

• Key downside risks are lower-than-expected sales volumes and the depreciation of the MYR against the USD.

Source: RHB Securities Research - 25 Aug 2023