MGRC reiterated that its earnings growth will gather momentum in coming quarters, driven by maiden contributions from Thailand and the Middle East as it ramps up its distribution network and footprint overseas for its biopharmaceutical products. We keep our forecasts, TP of RM1.07 and OUTPERFORM call.

We came away from MGRC’s 1QFY23 post-results briefing feeling positive. The key takeaways are as follows:

1. The group reiterated that its earnings growth is expected to gather momentum in coming quarters driven by their biopharmaceutical products (immunotherapy and cell therapies including producing Car-T cells and natural killer cells) as it ramps up its distribution network and footprint overseas. Already, the group had, in 1QFY23, registered maiden contributions from Thailand and Middle East and expect orders to continue to flow through in coming quarters.

Recall, over the past 12 months, the group has established alliances with key distributors that have their respective captive markets to distribute its products and services. It has formed collaboration with: (i) Ajlan & Bros Medical Company, Saudi Arabia, to distribute genetic tests and cell therapies in the Middle East and North Africa region, and (ii) Acquest Healthcare Stem Cell Research and Development Co Ltd to produce CAR T-cells for supply to Acquest's customers, provider of various cell therapies to hospitals, specialist doctors, and patients in Thailand.

2. The group revealed that 1QFY23 could have come in stronger but for a one-off item, i.e. lumpy staff bonus payments. Recall, MGRC’s 1QFY23 net profit jumped 3.5x YoY to RM0.8m thanks to contributions from immunotherapy and cell therapies came in at 14% of our full-year forecast. Ceteris paribus, EBITDA margin in 4QFY22 was 50% (vs. our FY23 assumption of 40%) which we equate it to the margin for the biopharmaceutical business following the absence of contribution from Covid-19 vaccine distribution. Hence, for illustrative purposes, assuming EBITDA margin of 40-50%, normalised 1QFY23 net profit works out to RM1.6m which is 25% of our full-year FY23 net profit forecast.

3. The group is targeting renal care (dialysis service) segment to start contributing to the group’s revenue by the end of FY23. We have yet to factor in any renal care contribution into our FY24 earnings forecasts. MGRC also plans to form partnerships with other kidney dialysis operators to offer their expertise and services on a personalised kidney care model, instead of opening new dialysis centres. This will allow it to indirectly operate centres across the country on a personalised kidney care model, integrating dialysis with nutrition management, lifestyle changes, and even genetic testing of patients and their immediate family members.

4. MGRC is on the lookout for potential acquisitions and partnerships as part of its strategy to build a diverse portfolio of earnings accretive assets across Southeast Asia, which will also complement its genomics and biopharmaceutical business.

We like MGRC for: (i) the rising adoption and hence tremendous growth potential of immunotherapy globally, (ii) having the exclusive rights to deliver such therapy in the region under a long-term licensing agreement with reputable principals, and (iii) being the leading provider of genetic sequencing and analysis in Southeast Asia.

We maintain our forecasts and TP of RM1.07 based on 17x FY24F EPS, in line with the average of its international peers such as Fulgent Genetics Inc, Mega Genomics Ltd, Novogene Co Ltd and Neogenomics Inc. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3).

Key risks to our recommendation include: (i) failure in clinical trials could scupper new-product break-through, which could lead to the inability to recover cost incurred for the pre-clinical and clinical trials, (ii) its dependency on commercialisation of new products and slower-than-expected commercial operation of the new lab to generate new revenue stream in the future.

Source: Kenanga Research - 29 Nov 2022