Investment Highlights

• We maintain BUY on Apex Healthcare (Apex), although the share price has increased by 8% over the past 3 months, with an unchanged the fair value (FV) of RM3.73/share, based on FY23F PE of 22x. This is at 0.5 standard deviation above its 4- year average of 20x, with a neutral ESG rating of 3 stars.

• We increase FY22F earnings by 12.5% following an analyst briefing, as management guided that Apex’s bottomline in Oct-Nov 2022 will be sustainable with demand normalisation expected only in Dec 2022 onwards. Hence, we maintain FY23F-24F earnings.

• These are the salient highlights of the briefing:
  • Apex’s own product brands, which enjoy a superior PBT margin of 28.2% vs agency/general’s 4.8% in 3QFY22, registered a 33% YoY increase in sales to RM200.7mil in 9MFY22, spurred by stronger demand for cough, cold and flu medications. This raised the segment’s share of group revenue to 31% from 26% in 9MFY21.
  • Agency brands, which accounted for almost half of 9MFY22 group revenue, rose by 6% YoY to RM323mil, thanks to strong demand for cough, cold, flu and throat lozenges. However, the share of this segment’s revenue to the group decreased to 49% from 53% in 9MFY21 as own product brands grew as a faster pace.
  • General brands, accounting for 20% of 9MFY22 group revenue, improved by 13% YoY to RM133mil mainly propelled by the sale of face masks, Covid test kits, paracetamol and cough/flu medication.
  • Notably, flu-related medications are the major drivers across the 3 segments. We believe these were due to Covid-19 transitioning to a general respiratory illness amid rising flu cases in Malaysia and Singapore.
  • Apex guided that sales in Oct and Nov 2022 will be supported by:
    (a) continued strong demand for flu-related medications;
    (b) healthy restocking activities amid drug shortages; and
    (c) fulfillment of backlog orders accumulated in 9MFY22.
  • However, demand for flu-related medications could exhibit normalisation in Dec 22 and early FY23F, in view of declining flu cases in Malaysia and Singapore (Exhibit 1 & 2).
  • Separately, the manufacturing segment’s margin increased from 25.5% in 1QFY22 to 28.2% in 3QFY22, which was even higher than FY19 average quarterly margin of 23.3%. Apex attributed this high margin to improved economies of scale anchored by strong demand for the group’s flu-related medications under its own brand. With demand normalisation, we expect the margin to normalise in 4QFY22F and in early FY23F.
  • For 40%-owned Straits Apex, Apex guided that:
    (a) 4QFY22F performance will be similar to 3QFY22; and
    (b) FY23F performance will be stronger than FY22F, based on current outstanding orderbook and guidance from customers.
    Straits Apex, which manufactures orthopaedic devices and surgical instruments for global multinationals, registered an impressive 10x YoY surge to RM15.1mil in 9MFY22 pretax profit, mainly underpinned by:
    (i) A resurgence of hospital surgeries;
    (ii) Customers seeking Asian alternatives in view of rising production costs against the backdrop of closures of smaller contract manufacturers in Europe and USA; and
    (iii) Being a beneficiary of multinationals’ China+1 outsourcing strategy.
    To recap, Straits Apex plans to expand production space by 30% in 4QFY22F to cater for higher expected orders in FY23F.
  • Apex indicated that contribution from the 40%-owned Singaporean-based joint venture with Shanghai Pharmaceuticals Holding could commence by late-FY24F with the focus on the high-end generic drugs. Hence, the impact is unlikely to be significant in the medium-term.
• Apex has been enjoying strong CAGR growth over the past 20 years with revenue rising at 9% and earnings 10% (Exhibit 3), anchored by an ageing population, public health education advancement and steady healthcare expenditure increase. Apex also exhibited resilience and flexibility during the Covid-era via rapid identification and supply of in-demand products. Additionally, Apex’s net cash position of RM136mil represents a significant 8.5% of its market cap.

• Hence, the stock currently trades at an undemanding FY23F PE of 20x, vs its 3-year peak of over 25x, with decent dividend yields of 2%.

Source: AmInvest Research - 21 Nov 2022