• Keep BUY and MYR5.40 TP, 10% upside with c.4% yield. Kotra Industries’ 1HFY24 (Jun) earnings came in below our and Street’s expectations due to an unfavourable product mix and a high-base effect. However, sequential topline growth turned positive for the first time following four consecutive quarters of decline, indicating a positive recovery in consumer demand for over-the- counter (OTC) products. We expect the gradual improvement of the economy and rising health awareness to propel Kotra’s growth moving forward.

• Results overview. 1HFY24 core earnings came in at MYR25m (-32% YoY), missing our and Street’s full-year estimates. Weaker-than-expected results were due to an unfavourable product mix as well as a high-base effect (the previous quarter saw pent-up consumer demand due to shortages of various prescription medicines in Malaysia). Export sales grew 32% QoQ – accounting for 36% of group revenue – and helped offset a lacklustre performance in the local sales segment (-2% QoQ).

• Margins. 2QFY24 operating margin contracted 1.6ppts QoQ and 5ppts YoY due to the unfavourable product mix. Export sales tend to command lower margins than local sales, as they require extensive advertisement and promotional spending as well as incur higher distribution costs.

• Outlook. Following a better-than-expected trade performance, RHB Economics sees a rosier growth outlook for Malaysia in 2024, underpinned by China’s positive economic dynamics. The possibility of rate cuts and easing of monetary conditions (by the US Federal Reserve) by 2H24 would further support global economic conditions. We are positive on KTRI as nutraceutical products are considered discretionary products. Mid-to-longer term prospects are expected to be anchored by rising health awareness among consumers and the ageing society trend.

• Earnings estimates and valuation. We leave our estimates unchanged as we expect earnings to recover by 2HFY24. Our TP is based on 12x CY24F P/E, at 0.8SD above its pre-COVID-19 5-year historical mean of 11x, as we expect the pick-up in consumer discretionary spending to boost demand for nutraceutical products this year. Our BUY call is premised on the group’s capacity driven growth story (its existing manufacturing plant is running close to optimal capacity, and the completion of the new manufacturing plant this year should anchor growth moving forward). Our TP includes an ESG premium of 2% as Kotra’s ESG score of 3.1 is above the country median.

• Key downside risks: A spike in raw material prices, unfavourable drug pricing mechanism by the Government, and depreciation of the MYR vs USD.

Source: RHB Research - 22 Feb 2024