• Still NEUTRAL, with new MYR4.70 TP from MYR4.30, 9% upside. Kotra Industries’ 1QFY25 (Jun) earnings exceeded our and Street’s expectations thanks to stronger sales for pharmaceutical products, which was offset by a subdued performance from supplement products sales in the local market. Despite the industry prospect remaining robust, intensified competition and the persisting subdued consumer demand for supplement products could limit Kotra’s growth potential in the near-to-medium term. It is currently trading at 11x FY25F P/E, 0.6SD above its 5-year historical average of 10x.

• Results. Kotra’s 1QFY25 core earnings registered 17.7% YoY growth to MYR15.7m, exceeding expectations at 30% of both our and Street’s full-year estimates. The YoY increase was primarily driven by increased demand for pharmaceutical product sales in both local and export markets. Meanwhile, sales of its flagship Appeton supplement products are gaining traction in the export market despite facing reduced demand locally. The board declared an interim dividend of 12.5 sen, representing a payout ratio of 190%.

• Margins. 1QFY25 core margin contracted 1ppt YoY to 24% – likely driven by an unfavourable product mix (higher export vs local sales) and higher tax provisions given the availability of unutilised capital allowance and unabsorbed tax losses brought forward in 1QFY24. Elsewhere, Kotra’s opex as a percentage of total revenue edged up 6.9ppts YoY due to the weakening of USD against MYR as its export sales proceeds are denominated in USD.

• Outlook. The Malaysian vitamins and supplement market was valued at USD1.14bn in 2023 and is projected to grow up to USD1.66bn by 2028, representing a 5-year CAGR growth of 8%. Despite the bright outlook, the industry remains fragmented and clouded by fierce competition. This is on top of persisting subdued demand for consumer healthcare products as health awareness amongst consumers dissipates post COVID-19 pandemic. We think this could limit Kotra’s growth potential in the near-to-medium term.

• Earnings estimate and valuation. We raise our FY25-26F earnings by 9% and 8%, taking into account stronger pharmaceutical sales and lower raw material costs as active pharmaceutical ingredients (API) prices has normalised to pre-pandemic rates. Post adjustment, our TP is raised to MYR4.70 based on an unchanged 12x FY25F P/E against its 5-year historical mean of 10x. Kotra currently trades at 11x FY25F P/E. Our TP incorporates an ESG premium of 2% as its ESG score is above our 3.0 country median.

• Key downside risks: Spikes in raw material prices, lower-than-expected consumer demand for supplements, and depreciation of MYR vs USD.

Source: RHB Securities Research - 28 Nov 2024