KEY INVESTMENT HIGHLIGHTS

• Pharmaniaga’s 2QFY20 earnings came in +7.5% higher year-over-year at RM9.9m

• Revenue was sustained by increase in sales of personal protective equipment (PPE) in fight against Covid-19

• Earnings was impacted by limited access to healthcare facilities following enforcement of MCO

• Second interim dividend of 2.5sen declared

• FY20-21F earnings estimate maintained

• Maintain BUY with a revised TP of RM4.74 per share

2QFY20 earnings boosted by sales of PPE. Pharmaniaga’s 2QFY20 earnings came in at RM9.9m. This brings its 1HFY20 cumulative earnings to RM32.4m which was within ours and consensus’ FY20 earnings estimates at 41.8% and 45.3% respectively. Despite only meeting 41.8% of our FY20F earning estimate, we deemed it as in-line as second quarter is typically a weak quarter for Pharmaniaga. During the quarter, revenue grew by +7.3%yoy to RM645.8m primarily driven by the increase in sales from its nonconcession business. In particular, the quarter saw an increase in the sales of personal protective equipment (PPE) due to the fight against Covid-19 which was at its peak in 2QFY20. Consequently, earnings grew by +7.5%yoy to RM9.9m during the quarter due to the better revenue recognition. On a quarterly sequential basis; revenue and earnings dipped by -21.2%qoq and -55.4%qoq due to limited access to hospitals, doctors and pharmacies following the enforcement of the movement control order (MCO) during the quarter.

Logistics & Distribution (L&D). The segment revenue grew by +16.0%yoy in 2QFY20 to RM471.7m whilst segment EBIT increased by +22.6%yoy which was primarily driven by its non-concession business following increased sales in PPE. During the quarter, the segment’s EBITDA margin also improved marginally to 4.2% in 2QFY20 vs 4.1% in 2QFY19 attributable to the lower depreciation cost arising from the recently fully amortised Pharmacy Information System (PhIS).

Manufacturing. Segment revenue grew marginally by +1.1%yoy whilst its EBIT contracted by -53.9%yoy respectively in-line with the lower sales order from the government hospitals. This was also further exacerbated by the MCO which has limited its access to nonGovernment healthcare facilities, doctors and pharmacies. Furthermore, we opine that the contraction was also caused by increased OPEX relating to its newly launched products as well as; the ongoing international expansion which has caused margins to decline.

Indonesia division remains in loss-making position. Pharmaniaga’s Indonesian division registered a lower revenue by -11.0%yoy during the quarter attributable to the limited access to healthcare facilities in Indonesia following the implementation of its Pembatasan Sosial Berskala Besar (PSBB). Furthermore, the division reported a -54.6% decline yearover-year at the EBIT level due to the delay in payment by government hospitals in Indonesia which is currently affecting the healthcare industry in that country.

Second interim dividend of 2.5sen declared. In-line with its performance during the quarter, Pharmaniaga has declared a second interim dividend of 2.5sen for the quarter under review. This brings its 1HFY20 dividend declared to 8.5sen which within our FY20F dividend forecast of 16.8sen. The 8.5sen is also comparable with the dividend declared during the same period last year. The 1HFY20 dividend declared represents a payout ratio of 68.5% of its 1HFY20 EPS of 12.4sen and translates to an annualised yield of 3.8% to Wednesday’s closing price of RM4.42.

Impact to earnings. We are making no changes to our FY20-21F earnings estimate at this juncture pending its analyst briefing which is to be held next week.

Target price. We are revising our target price to RM4.74 (previously RM3.15) per share. This is derived via pegging our FY21F EPS of 31.6sen to a revised target PER of 15.0x which is the average of its historical five-year rolling PER. We opine that this is fair given that there is a potential upward earnings trajectory following the recent announcement by the Government on the re-packaging and distribution of Covid-19 vaccine within Malaysia – of which Pharmaniaga is one of the frontrunners to secure the tender.

Maintain BUY. All things considered, we are maintaining our BUY recommendation on Pharmaniaga considering that the company remains as the few beneficiary in the current global Covid-19 pandemic crisis. With the resurgence of new cases in several countries that have eased their respective Coovid-19 measures, the fight remains to this very day despite number of newly infected cases is lower than before. Hence, we opine that this will continue to drive the demand for healthcare-related products which include: (i) drugs and supplements; (ii) PPEs; and; (iii) various medical consumables as we foresee that the Covid-19 pandemic is not going away anytime soon following the absence of a confirmed vaccine.

In this regard, Pharmaniaga is well-positioned to benefit from this as it among the few industry players that have the capability to manufacture as well as; distribute medical drugs and pharmaceutical products nationwide owing to its extensive network of logistics. Additionally, it is still an attractive stock to accumulate given its positive industry-wide growth prospect and; it is currently trading at an attractive forward PER of 14.0x (lower than its similar-sized regional peers which typically averages at >20.0x forward PER). Also, it has a decent FY21F dividend yield of 3.9%

Source: MIDF Research - 21 Aug 2020