Post Duopharma’s 2QFY23 investors briefing, we maintain our earnings forecasts and Buy recommendation for Duopharma with an unchanged TP of RM1.47 based on a PE multiple of 16.0x CY24 EPS. Looking forward into 2H23, we expect sales to remain flattish on a QoQ basis. Positively, we also expect strong earnings recovery in FY24 driven by higher contribution from the government sector and growth in the consumer healthcare segment.

2Q23 Dragged by Weak Demand and Higher Cost

To recap, 2Q23 was a challenging quarter for Duopharma amid lower pharmaceuticals demand in all main sectors. Coupled with cost pressures such as high electricity tariff, finance costs and the start-up cost for the commencement of new K3 facility, 2Q23 net profit sank 44.6% QoQ and 23.1% YoY to RM12.5mn.

Management shared that 2Q23 top-line growth was weaker than anticipated due to: i) lower sales from the consumer healthcare segment (-30% YoY) as Vitamin C sales remained subdued post pandemic, ii) supply shortage of Insulin (RM36.3mn in 1H23 vs. estimated contract value of RM125mn per annum) and iii) loss of an agency line, contributing about RM15mn per annum in revenue. In addition, the group saw a tapering demand from the government sector as the APPL contracts (20-25% of revenue) have expired on 30 June 2023. Moreover, APPL products are currently based on purchase order issued, albeit at slower pace (need basis rather than forecast basis).

2H23: Near-Term Outlook Remains Challenging

For 3Q23 and 4Q23, we expect sales and PBT margin to remain flattish (similar with 2Q23). We believe that government sales will remain lacklustre, given that the APPL products are based on the purchase order in 2H23. In addition, the consumer healthcare sector has normalized downward and is expected to persist throughout the remainder of the year. Positively, management shared that Duopharma’s 2H23 insulin contribution will be better compared to 1H23.

Separately, Duopharma will enjoy reinvestment tax allowance of about RM10mn for its new K3 facility, which will be claimed in FY23. In our forecast, we have assumed an effective tax rate of 9.2% for FY23.

Remain Sanguine on FY24 Prospects

Beyond prevailing demand softness, we remain bullish on Duopharma’s FY24 prospects. We anticipated a recovery in the government sector, driven by the new APPL contracts. Note that the tendering of the new APPL contract (circa 20-25% of revenue) with the Government of Malaysia has started and is expected to be concluded by 1Q24. We expect APPL volumes to be higher by 3-5% while average prices will increase as well. As for the non-APPL products such as Insulin, we expect Insulin contribution to be higher at RM90mn for FY24 (vs. estimated RM75mn in FY23).

Meanwhile, we believe that the consumer healthcare segment (15-20% revenue) will see an upward trend, given that Vitamin C sales has bottomed in 2Q23. In addition, the IRORO brand halal-certified anti-hair loss products are now available to consumers through e-commerce platforms in Malaysia. The stem cell used in IRORO will be able to promote hair growth as well as scalp improvement. As for the ethical specialty sector and export segment, we expect sales to remain resilient in FY24. In all, we expect Duopharma’s net profit to surge 26.3% to RM88.4mn in FY24

Valuation & Recommendation

We maintain our earnings forecasts and TP for Duopharma at RM1.47 based on a PE multiple of 16.0x CY24 EPS. Reiterate our Buy recommendation on the stock.

Source: TA Research - 15 Sept 2023