• Maintain NEUTRAL and DCF-derived MYR1.34 TP, 8% upside. Duopharma Biotech reported 3Q24 core earnings of MYR17.8m, bringing 9M24 to account for 79% and 77% of our and Street estimates. Results were deemed in line as 4Q24 is typically a softer period. Despite the public sales segment was encouraging, we are of the view that some sticky costs structure (higher staff cost and electricity tariff) together with subdued consumer demand for supplement products are set to weigh on its profitability.

• Result overview. 3Q24 core earnings grew 47% YoY, primarily driven by the increase sales from the public sector (given the renewal of the approved products list (APPL) contract in May), offset against by the subdued performance from the consumer healthcare (CHC) segment. Depreciation charges and finance cost rose 15% and 23% YoY, of which its K3 production facility received the certificate of completion and compliance (CCC) in 2Q23 (with both costs are no longer allow to be capitalised).

• Margin overview. 3Q24 GPM contracted 1.3ppts YoY in view of the effect of the strengthening of the USD against MYR in the earlier part of 2024 given its key raw material – active pharmaceutical ingredient price (API) is denominated in USD. Core margin was largely flattish QoQ and YoY at 8.5% (3Q24: 8%; 3Q23: 7.2%) due to the higher depreciation charges and increased operational cost associated with K3 facility’s full operation.

• Outlook. The USD had depreciated by 6% QoQ vs the MYR in 3Q24. We expect this to bodes well for DBB given 50% of its cost of sales (ie API) are denominated in the USD. Elsewhere, we believe the impact will only be felt by 4Q24 given the time lag effect required to consume the raw material it had previously replenished. Its prospects should also be underpinned by: i) The recent additional letter of award by the Ministry of Health (MOH) for the supply of pharmaceutical products under the APPL contract (bringing its product range to 96 from 86); and ii) potential renewal of human insulin supply contract with MOH (expected to conclude by 1Q25).

• Earnings estimates. We make no changes to our estimates pending further details in the upcoming result briefings. While we are optimistic on the pickup in the public sales segment, ongoing cost pressures and persists sluggish CHC sales are expected to weigh on DBB’s profitability moving forward. The stock is currently trading at 14.5x 2025F P/E, or -0.6SD from its 5-year historical mean of 17x. Our TP incorporates a 4% ESG premium given DBB’s ESG score is above the country median. Downside risks to our call include lower-than-expected sales volumes and stronger USD/MYR. The converse represents the upside risks.

Source: RHB Securities Research - 11 Nov 2024