• Maintain BUY with new DCF-derived MYR1.44 TP from MYR1.41, 16% upside. We came away from Duopharma’s post results briefing feeling upbeat. DBB is expected to see steady revenue growth predicated by the recovery of consumer healthcare (CHC) sales and the recent renewal of approved product purchase list (APPL) tender. It is currently trading at 0.2 SD below its 5-year historical mean of 17x, which we deem unjustified given its i) Better than peers’ margin profile; ii) higher budget allocation for healthcare sector, and iii) advantages in handling trends of an ageing society.

• Key takeaways. DBB has seen an encouraging pick-up in local sales segment (+8% QoQ), indicating sluggish consumer demand for CHC products had bottomed. Moving forward, the group expects CHC segment growth to be largely driven by analgesic products (ie painkillers) as well as its regional expansion to drive vitamin C sales (ie Flavettes, Champs and Proviton). It also intends to expand its CHC product offerings range to reduce the reliance on vitamin C sales. The group has set up its regional office in Indonesia (with the wholly-owned subsidiary incorporated in Apr 2023) – spreading its regional footprint to a third country after Singapore and the Philippines. DBB’s immediate objective is to provide contractually-manufactured oral solid dosage products (OSD) to the Indonesian market.

• Capacity expansion. Following the receipt of the certificate of completion (CCC) of its K3 facility in Jul 2023, management guided that its 2024 capex spending is expected to be lower than 2023 as most expansions near the tail- end. The remaining capex is expected to be channelled towards: i) Expanding biologics-manufacturing capabilities at K5 (expected to commence by end- 2024); ii) using the available space (40,000sq ft) in K2 facility for injectable drugs; iii) upgrading its Highly Potent Active Pharmaceutical Ingredient (HAPI) facility to secure EU GMP certification by end of 2024.

• ESG. DBB continues to reassure its commitment to drive the sustainability agenda, particularly in reducing carbon footprints (targeted to reduce emissions by 10% annually), and empowering workplace diversity. Its FTSE4Good Index rating has increased to 4.4 in 2023 from 3.9 in 2022 (management’s long-term target is to maintain >4 rating). It also achieved 0.36% reduction in total carbon emission intensity in 2023. As such, we raise our ESG score to 3.2 from 3.0, which translates to a 4% ESG premium applied to our TP, based on our in-house methodology.

• Earnings adjustment and valuation. We trimmed our FY24-25F earnings by 12% and 13% as the CHC sales recovery was below our expectation, offset by an uptick in public sector sales. We also lowered our capex assumption to align with management’s guidance. Post adjustment, our TP is now higher at MYR1.44, implying 16x FY24 P/E, 0.3SD above its 5-year historical mean.

Source: RHB Research - 10 Jun 2024