• MYR2.90 FV based on 20x FY24F P/E. Apex Healthcare is the prime beneficiary of: i) Potential pent-up demand for cough and flu products amid a resurgence of COVID-19 cases, ii) rising health awareness, and iii) the ageing society trend. We expect its capacity-driven strategy and inelastic consumer demand towards pharmaceutical products to propel earnings growth. Valuations are compelling, as APEX currently trades at 17x 2024 PE, -0.7SD below its historical mean.

• Pent-up demand expected on rising COVID-19 numbers. Reported COVID-19 case numbers recently increased 88% to 12,757 during the second week of December vs 6,796 last week. The situation is likely to be worsen in conjunction with the year-end festivities and school holidays according to Health Director-General Dr Muhammad Radzi Abu Hassan. Given the higher chances of infection in view of the new COVID-19 variant, coupled with the lack of public awareness in wearing face masks, the rising confirmed cases trend could potentially lead to pent-up consumer demand towards cough and flu medicines as seen in 2H22.

• Capacity-driven growth outlook. We expect further upside to be supported by an organic expansion pipeline, given that the Cheng Industrial Estate production facility in Melaka is fully utilised. APEX recently entered into a sales & purchase agreement (SPA) with Panasonic Appliances Refrigeration Devices Malaysia for the acquisition of 20.7 acres industrial land at this estate. The industrial complex comprises two main factory buildings and has been assessed as suitable for retrofitting to meet XepaSoul Pattinson (Malaysia)’s (Xepa) manufacturing requirements, effectively reducing necessary construction costs.

• Resilient healthcare products demand. To date, APEX’s distribution network encompasses 15,505 customer accounts (primarily comprising clinics, pharmacies, hospitals, and retail and general stores here). Demand for dietary supplements in Malaysia is set to record a healthy 5-year CAGR growth of 4.5% from 2022 to 2027. Factors contributing to the robust growth include increasing personal health awareness, demand-driven consumption, and the rising ageing society trend.

• Earnings forecast and valuation. We project a 3-year earnings CAGR of 4% from 2022 to 2025 (stripping out Straits Apex Group’s (SAG) contributions, the 3-year CAGR would have been 16%) vs 11%, ie the 10- year average growth rate of medical products’ retail sales. We adopt a P/Ebased valuation with 20x FY24 PE to drive a FV of MYR2.90. The valuation is in line with APEX’s 5-year historical mean, given its better earnings visibility, better-than-peers margins profile, and capacity-driven growth outlook. Key risks: FX fluctuations, changes in the regulatory environment, loss of key principals, and higher-than-expected operating costs.

Source: RHB Securities Research - 19 Dec 2023