• Keep BUY, new MYR1.35 TP (DCF) from MYR1.38, 11% upside. 3Q23 results missed our and Street’s expectations on weaker-than-expected sales from the consumer healthcare (CHC) wing. Moving forward, we expect growth to be underpinned by robust drug procurement from the public (on higher budget allocations) and private sectors, renewal of the Approved Product Purchase List (APPL), and potential synergies generated from Duopharma Biotech’s investee firms. Our TP incorporates 4% ESG discount to our intrinsic value as its ESG score is below our country median.

• Result overview. 3Q23 core profit slipped 62% YoY to MYR9.9m, bringing 9M23 numbers to MYR52.5m (-38% YoY) or 64% and 66% of our and Street’s full-year estimates. The weaker-than-expected result was due to sluggish performances from the CHC division (-25% to -30% YoY) as consumer demand for health supplement products dissipated post the pandemic. The public sector segment was dragged by a shorter tendering period from the procurement of APPL supply, as supply and delivery were done on a purchase orders basis vs the annual tendering period under the APPL model. This resulted in the local sales segment declining 5% YoY.

• Margin overview. 3Q23 GPM contracted 2.7ppts YoY, likely driven by the upward revision in electricity tariffs and DBB being impacted by the USD’s strengthening, which drove active pharmaceutical ingredient prices or APIs higher. Core profit margin contracted 8.9ppts YoY in view of the incremental costs associated to the commencement of the new production facility (K3).

• Outlook. We expect sequential improvements in public sector sales in the coming quarters on: i) Higher budget allocations for drug procurements to the Health Ministry (2024: MYR5.5bn, 2023: MYR4.9bn) and ii) the APPL contract having been extend until Dec 2023 (it is expected to be reviewed with a new contract term by 1H24). Growth momentum from the private sector should continue to be anchored, in our view, by the pick-up in international patients, ageing society trend, and support from the Government’s reform agenda.

• We lowered FY23F-24F earnings by 13-3%, taking into account higher raw material costs and costs associated with the commissioning of K3.

• Maintain BUY with a lower MYR1.35 TP. Valuations are appealing, as DBB is trading at 12x 2024 forward P/E, 0.9SD below its 5-year mean of 17x. We deem this as unjustified, given its better-than-peers margins profile and long-term growth potential from investments into higher-value offerings, eg oncology and biosimilar products like ERYSAA, a halal-certified erythropoietin or EPO that treats anaemia in patients with chronic kidney diseases. Key risks: Lower-than-expected volumes sold and depreciation of the MYR against the USD.

Source: RHB Securities Research - 9 Nov 2023