Key takeaways from Duopharma’s analyst briefing are: i) high chances of renewal of its insulin contract and more aggressive in government tenders, ii) recent rollout of new products, iii) FY19 to be a better year. Overall, we are still positive on the group’s growth strategy (moving into a more niche product segment). PBT margin are expected to remain stable at 12.1%. We increase our earnings for FY19/FY20/FY21 by 5.6%/2.3%/0.5% after tweaking our margins assumption. Maintain BUY on Duopharma with a higher TP of RM1.61/share (previously RM1.52/share) based on unchanged 20.0x CY19 EPS.

High Chances of Renewal of Insulin Contract

Over the past two years, Duopharma Biotech (Duopharma) had seen robust revenue growth in all segments. In specific, supplies to the government sector recorded the strongest growth of average 52%, thanks to the 3-year government contract to supply insulin to general hospitals nationwide worth RM300mn. The private and export sectors, meanwhile, also chalked up satisfactory growth, averaging 12% and 2% respectively over the past two years. In terms of revenue breakdown, the government sector remained the highest contributor with 50% contribution to FY18 revenue, followed by the private and export sectors, which accounted for 42% and 8% respectively. In terms of revenue breakdown by product, the core product was insulin, which contributed 20% to the group’s FY18 revenue.

As highlighted in our recent report dated 8 March, the first term of insulin contract will expire in Nov-19. Meanwhile, the tender of government contract to supply Erysaa, Erythropoietin (EPO) will be called anytime this year. In the briefing, we understand from management that the company has engaged with the Ministry of Health for the 2-years extension. The management is confident about the contract being renewed given its competitive pricing and the proven track record (i.e.: delivery timing and quality) for the supplies of insulin over the past 2 years.

For EPO, the tender will likely be called before May-19. Management believes the chance in clinching the contract is high, owing to competitive pricing and minimal competition. The estimated value of the contract is RM10-15mn/year. In our forecast, we have assumed the company to achieve insulin contract renewal and EPO contract. We estimate sales of drugs under the non-Approved Product Purchase List (APPL), which cover insulin, and supply of EPO to contribute RM190mn, or 35% to FY19 revenue.

FY19 to be a Stronger Year

As far as earnings are concerned, contribution from insulin, EPO, other new niche (Trastuzumab, for breast cancer and Daclatasvir for Hepatitis C) and over the counter products, coupled with strengthening of the ringgit, are expected to boost FY19 earnings. We project FY19 earnings to grow by 9.8%. At current share price, dividend yield remains attractive at 4.6% based on FY18. Given the rise in profit, we now believe that the group would payout 70% of earnings as dividend in FY19 (75% in FY18).

Impact

We increase our FY19/FY20/FY21 earnings estimates by 5.6%/2.3%/0.5% after adjusting our margins assumptions higher by circa-0.8% and making some minor changes to our earnings model. We also tweak our dividend payout ratio to 70% from 50% previously.

Valuation & Recommendation

We maintain Buy on Duopharma with a higher TP of RM1.61/share (previously RM1.52/share) based on unchanged 20.0x CY19 PER. We continue to like Duopharma for its: i) strong market share in Malaysia, and ii) move into niche pharmaceuticals products.

Source: TA Research - 22 Mar 2019