• Reiterate BUY, with new DCF-derived MYR1.38 TP from MYR1.59, 21% upside and c.3% FY24F yield. Post Duopharma Biotech’s results briefing, we come away feeling cautiously optimistic. Margin is expected to sustain in 2H23 notwithstanding labour and utilities cost pressure. With the approved product purchase list (APPL) tender likely completed by 1Q24 and potential increase in budget allocation for the healthcare sector, we remain positive on DBB’s mid- to long-term prospects. Currently trading at -1SD from its 5-year mean, we believe valuation has priced in 2023’s earnings weakness.

• Key takeaways. Following normalised growth in the consumer healthcare (CHC) segment, revenue is likely to pick up sequentially in 3Q23 thanks to the commercialisation of halal-certified anti-hair loss products (IRORO brand) which could potentially cushion weakness in vitamin sales. There are no apparent liquidity risks arising from PN17 status of Pharmaniaga (PHRM MK, NR) – PHRM has given its written commitment to fulfil its financial obligation to DBB, which has continued to receive payments from the former in relation to the awarded APPL contract. Post certificate of completion (CCC) of the K3 plant in 2Q23, DBB expects to recognise potential tax savings of MYR10m by 2023 (although it has until 2026 to recognise it).

• APPL contract. Tendering for the new APPL contract has started and is expected to be concluded by 1Q24. We are positive with the development as the drug supply contract has been carried out on a rollover basis (based on 2017 terms) whereby the contract terms do not reflect the latest exchange rate. APPL contracts accounted for c.20% of DBB’s revenue in 2Q23.

• Cost. We estimate that every 1% appreciation of USD could potentially erode its earnings by 0.5% given active pharmaceutical ingredients (denominated in USD) account for c.50% of DBB’s total cost. Management is cognisant of the higher electricity tariff and labour cost that could weigh on margin moving forward. Nevertheless, the company still commands pricing power to pass on cost to customers, predominantly via its private segment. DBB had been able to maintain a commendable gross margin profile of 40-41% in the past six years.

• Earnings adjustment. We lower our FY23F-24F earnings by 10-12%, taking into account the higher finance cost as well as depreciation charges in relation to the commercialisation of the K3 plant.

• Maintain BUY, with a lower TP of MYR1.38. We ascribe a 4% ESG discount to our intrinsic value to derive our TP. Our TP implies 14x FY24F P/E, or -0.7SD from its 5-year mean. We still like DBB, underpinned by its gradual increasing exposure to the private sector, strong presence in the local CHC market, and better-than-peers’ margin profile.

Source: RHB Securities Research - 15 Sept 2023