Investment Highlights

• We reiterate BUY on Duopharma Biotech (Duopharma) with an unchanged fair value (FV) of RM2.06/share. This is based on a FY23F target PE of 17x, at parity to its 5-year average. There is no adjustment to our neutral 3-star ESG rating.

• Our FY23F-25F earnings are maintained as we did not account for the distribution of Sputnik V vaccine in our sales assumptions, nor has the company purchased any in its inventory. Sputnik V have not been approved by Malaysia’s Drug Control Authority (DCA) since June 2021, the period when the group entered into supply agreements with Russian Direct Investment Fund (RDIF) and the Ministry of Health (MoH).

• Last Friday, Duopharma announced the termination of Seller Supply Agreement with RDIF effective on 24 Mar 2023, which will not incur any contractual penalties. To recap, Duopharma signed a term sheet agreement with RDIF in Jan 2021 to secure 6.4mil doses of Sputnik V vaccine. RDIF is the appointed marketing agent for Russia’s Gamaleya National Research Institute of Epidemiology and Microbiology (Gamaleya), which developed the vaccine for the Covid-19 virus.

• On the same day, the group also entered into a term sheet agreement with MoH to supply 6.4mil doses of vaccines 3.2mil Malaysians for a year. Both term sheet agreements would later become definitive supply agreements. In Jun 2021, Duopharma entered into seller supply agreement with RDIF and government supply agreement with MoH.

• Notably, Sputnik V vaccines had to be approved by Malaysia's DCA by 23 Nov 2021, for both agreements to be fully enforceable. In late Nov 2021, the government supply agreement would have been null and void because DCA clearance was not obtained by the stated date. However, the seller supply agreement had not been officially terminated given that neither party received written notice until last Friday.

• We continue to like Duopharma, the largest local pharmaceutical manufacturer in Malaysia. Its rosy prospects are underpinned by: (a) the rising take-up of generic drugs in Malaysia, (b) expiration of global industry’s patents from 2023F to 2026F, (c) booming bio-similar market, and (d) the growing Vitamin C market, which will benefit the Champs and Flavettes brands.

• The stock currently trades at a compelling FY23F PE of 12.7x, which is 25% below the 5-year average of 17x. Dividend yield is also decent at 2.3%. We reckon that Duopharma is a good alternative for investors seeking to switch from Pharmaniaga, which recently suffered losses from substantive stock writedowns.

Source: AmInvest Research - 27 Mar 2023