• Maintain NEUTRAL and MYR1.34 TP (DCF), 9% upside.We came away from Duopharma Biotech’s post-results briefing feeling cautious. While the Approved Product Purchased List (APPL) renewal provides earnings visibility, we expect the sticky cost nature, strengthening USD, and subdued consumer demand for supplement products are set to weigh on profitability moving forward.

• Key briefing takeaways. The public sales segment grew 40% YoY in 3Q24, thanks to the APPL’s renewal in 2Q24. Local private sector sales remain muted (2% QoQ, 8% YoY), as consumer growth demand for supplement products remain disappointing. Export sales grew 23% YoY, primarily driven by the Philippines market, but offset by slowdowns in Middle Eastern markets due to geopolitical conflicts. Moving forward, management plans to expand its footprint into nations like Indonesia and the Philippines, as exports could act as a natural hedge against DBB’s USD-denominated costs.

• Cost outlook. Active pharmaceutical ingredient or API prices have said to normalise to pre-pandemic levels, with DBB set to realise cost savings by end 2024 at the earliest. The implementation of minimum staff wages are set to be minimal (costs of <MYR0.5m pa or 0.1% of FY24’s total costs), given that it has been paying most of its staff >MYR1,700/month. DBB’s effective tax rate should stay at 24% (FY22-23: 17%), given the absence in tax deductible expenses. DBB does not have any sizable capex ahead, apart from some internal restructuring for its hormone steroids facility (K1) and injectable facility (K2), which are set for completion by mid-2026 and end 2026.

• DBB’s human insulin distribution contract for the Health Ministry (MoH) is set to expire by Apr 2025. While it is in active talks for a contract renewal, we understand it has only been able to realise c.65% of its existing contract (MYR375m) due to insulin shortages. MoH earlier blamed Biocon Biologics for failure to meet its contractual obligations over the supply of human insulin to the ministry. Novo Nordisk’s (20% of MoH’s insulin supply) decision to slash insulin production in the US in favour of more lucrative weight-loss drugs has also further exacerbated the situation. While we are confident of DBB’s ability to secure a contract renewal, we prefer to take a cautious stance before the insulin shortage situation can eventually be resolved.

• We make no change to our earnings estimate, as we expect a seasonally weaker 4Q24. Our DCF-derived TP of MYR1.34 implies 17x FY25F P/E, ie 0.1SD below its 5-year historical mean. We impute a 4% ESG premium to our TP too, as DBB’s 3.2 ESG score is above the 3.0 country median. Key downside/upside risks: i) Lower-/higher-than-expected sales volumes and ii) weakening/strengthening of the MYR against the USD.

Source: RHB Securities Research - 15 Nov 2024