2Q24 Recap

To recap, 2Q24 net profit surged 33.1% YoY to RM16.7mn mainly driven by the increase in sales under the new APPL contract, which the group secured recently. This boosted 2Q24 revenue higher by 30.3% YoY to RM218.3mn.

However, 1H24 net profit declined 9.1% to RM32.0mn despite higher revenue of 11.8% to RM411.3mn. Management shared that the public sector contributed 51% of 1H24 revenue as compared to 44% in FY23 due to the new APPL contract. The weaker performance was attributed to: i) decline in sales in the consumer healthcare segment, ii) some start-up costs from the newly completed K3 facility and iii) higher finance cost.

On exports fronts, 1H24 sales stood at RM30mn (vs. RM54.2mn in FY23) and is expected to grow further, driven by higher demand of renal products in the Philippines market and successful tenders in Singapore. Meanwhile, the consumer healthcare segment sales in 1H24 (about 15% of sales) was slightly weaker than 1H23 due to dropped in the adult vitamin C. Positively, Duopharma’s children vitamin C sales remained relatively resilient. Moving forward, we believe that CHC sales would improve driven by new products.

Into 3Q24, we expect the quarterly profit to come in the range between RM14.5mn-18.5mn, boosting the cumulative 9M24 profit to RM46.5mn-50.5mn or 75-82% of our full-year estimate.

Beneficiary of Stronger Ringgit

We remain optimistic on Duopharma’s growth prospects for 2025, driven by the allocation of RM45.3bn to the Ministry of Health (MOH) in Budget 2025, representing a 10% increase from the RM41.2bn allocated in 2024.

Duopharma’s new APPL contract, valued at RM665.8mn, involves the supply of 96 pharmaceutical and non-pharmaceutical products to Malaysian government facilities until 31 December 2026. This is expected to fuel future earnings growth. Furthermore, the stronger Ringgit is expected to enhance the profitability of the APPL contract further, as the contract terms are based on an exchange rate of RM4.70/USD (vs. RM4.20 in 2017).

Additionally, the appreciation of the Ringgit against the USD is expected to lower the cost of active pharmaceutical ingredients, most of which are imported from China, India, and Europe. Note that 50-60% of Duopharma’s COGS are denominated in USD. Our sensitivity suggests that a 4.9% positive impact on earnings for every 5% appreciation of the Ringgit against the dollar. All in all, we expect Duopharma’s FY25 earnings to grow by 43.1%, reaching RM88.4mn.

Disruption in the Supply of Human Insulin

Recently, the Ministry of Health (MOH) has clarified that the recent disruption in the supply of human insulin at local facilities was caused by production issues. As such, MOH has implemented measures such as the use of analogue insulin, oral therapies and would expedite interested overseas suppliers’ registration process.

Given the lack of human insulin, Duopharma is in communication with its Indian principal, Biocon and is also exploring alternative suppliers from China to meet the government’s demand. In our forecast, we expect insulin contribution to be higher at RM85mn for FY24 (vs. estimated RM75mn in FY23) due to more quantity available. Note that Duopharma’s 3-year contract worth approximately RM375mn to supply Insugen-Insulin Human Formulation will end on 28 April 2025. Thereafter, we are optimistic that the group would continue to supply human insulin to MOH.

K3 Plant on Track

Management reaffirmed that the progress of transfer of product to its new K3 plant from K1 in Klang is on track. Note that the new K3 plant (+50% more capacity vs. K1) has received the certificate of completion and compliance in 4Q23. We gathered that Duopharma is in the midst of transferring all K1 products to K3, which is expected to be running at 50-60% utilisation (vs. K1 utilisation of 80-85%), once fully transferred by 4Q24.

Impact

No change to our FY24-26 earnings projections.

Valuation& Recommendation

We reiterate Buy on Duopharma with an unchanged TP of RM1.50/share based on a PE multiple of 16.0x CY25 EPS and 3% ESG premium.

Source: TA Research - 8 Nov 2024