Review

• CCM Duopharma Biotech Bhd’s 9MFY17 net profit of RM30.6mn (+63.9% YoY) came above our estimates at 86.7%. The surprise was due to better margins enjoyed during the quarter (PBT margins +1.5pp QoQ, +3.0pp YoY). Revenue was in line, accounting for 78.4% of our estimates.

• YoY, 9MFY17’s revenue and net profit grew respectively by 48.9% to RM355.7mn and 63.9% to RM30.6mn. The robust performance was attributed to increased: 1) demand from the government sector via tenders and 2) supply of specialty products, especially with effect of the RM300.0mn contract from the Ministry of Health to supply insulin to all government hospitals and clinics from 2 December 2016 to 1 December 2019.

• QoQ, despite the marginal decline in revenue by 1.4% to RM115.4mn, net profit grew by 18.1% to RM11.4mn on better margins (PBT margins +1.5pp to 12.3%). Apart from lower cost of production (-4.2% QoQ) and operational costs, we opine that other contributing factors to the improved profitability could be a higher margin product mix alongside growing contribution from specialty products as well as the strengthening of the Ringgit against the USD, albeit marginally.

• On another note, we note that during the quarter, depreciation increased by 28.9% QoQ and 35.6% YoY to RM7.6mn as the group effected accelerated depreciation on machineries that will not be utilised upon the shift of operations from K1 (existing plant in Klang) to K3 (upcoming plant in Klang) sometime in the next 3 years.

Impact

• Our FY17/FY18/FY19 earnings estimates are revised by +10.7%/+10.4%/+9.4% upon adjusting assumptions for: 1) depreciation to factor in the accelerated depreciation for K1, and 2) margins on account for better profitability from increasing exposure to specialty products.

Outlook

• We expect the group to sustain its growth momentum on the back of sustained increase in demand for pharmaceuticals from both the government and private sector as well as export markets. For FY17/FY18/FY19, we project earnings growth of +45.7%/+7.1%/+7.1%. Greater traction from specialty products (i.e. insulin and oncology) would bode well for the group.

Valuation

• Our TP for CCM Duopharma Biotech Bhd is revised higher to RM2.70/share (RM2.45/share previously), based on a target PE of 18.0x against CY18 EPS. Beyond potential for earnings growth and decent dividend yields, we like the group for the prospects from its strategic foray into and growing exposure to high value specialty products. Reiterate BUY.

Source: TA Research - 20 Nov 2017