Investment Highlights

• We downgraded Apex Healthcare (Apex) to HOLD from BUY  previously after a strong 45% share price increase over the past 1 year together with a lower fair value (FV) of  RM3.90/share (from RM4.21/share previously) to account for lower earnings contribution from 40%-owned associate  Straits Apex Group (SAG). The FV is based on FY23F target  PE of 20x, at parity to its 5-year average. No ESG-related  adjustments based on our 3-star rating.

• Apex’s 1QFY23 core net profit of RM25mil generally came in  within expectations, accounting for 25% of our forecast and  the street’s. As a comparison, 1Q accounted for 15%-26% of  FY18-22 core net profit. 

• However, we reduced FY23F-25F forecasts by 7%/15%/14% to  account for Apex’s lower effective equity stake in Straits  Apex (SA) (an orthopaedics business) from 40% to 16%. The  divestment was completed on 11 May 2023 (Exhibit 2). Notably, there will be a one-off RM300mil disposal gain in  2QFY23F.

• We may revise forecasts again if Apex’s management  discloses new alternative investments with the divestment  proceeds of US$215mil (RM949mil) that can offset the decline  in later result briefing.

• No interim dividend has been declared in this quarter as Apex  historically declares dividend in 2Q and 4Q over the past 5  financial years. 

• On a YoY Basis, Apex’s 1QFY23 Core Earnings Soared 68% To  RM25mil, Spurred By: 

(i) record revenue of RM246mil (+14% YoY) mainly driven by  strong demand for flu-related medication in Malaysia,  owing to the prevalence of Covid-19 and increased flu  cases (Exhibit 3); 

(ii) surge in associate contribution to RM4.6mil (+5.4x) from  the group’s 40%-owned SAG as production capacity was  impacted by Covid-19 infections and persistent supply  chain disruptions in 1QFY22. 

• On a QoQ basis, Apex’s 1QFY23 core earnings declined by  20%, despite an 11% increase in revenue. The weaker  earnings werer mostly related to a 55% decrease in SAG’s contribution to RM4.6mil from RM10.3mil (including postadjustment of a one-off RM4.2mil impairment loss reversal).  This was primarily due to robust fulfilment of backlog orders  in 4QFY22.

• To recap, Apex guided in Feb 2023 result briefing that robust demand for flu-related medications resulting from restocking activities could persist until 1H2023F, before normalising in  2H2023F due to declining flu cases in Malaysia (Exhibit 3).

• Notably, SAG has commenced construction on a 237k square foot campus, consisting of 4 buildings, located in Batu  Kawan Industrial Park, Penang, for its upcoming lease to SA. The site is anticipated to be fully operational by the first  quarter of 2024. The quantum of contribution and lease payments that Apex will receive will be guided by management  in a subsequent result briefing. As for now, these contributions have not been factored in FY24F-FY25F earnings.

• As the stock currently trades at a fairly valued FY23F PE of 21x, near its 5-year average of 20x. Also, Apex offers a  slight dividend yield of 2%.

• On a positive note, Apex’s 1-for-2 bonus issue proposal was approved on 17 May 2023. The ex-date is 8 Jun 2023. We  continued to view this positively as this could increase trading liquidity and improve the affordability of the stock,  hence potentially broadening its shareholder base. Our ex-date FV translates to RM2.60/share.

Source: AmInvest Research - 25 May 2023