Pharmaniaga - Predicament Far From Over

Date: 
2023-11-30
Firm: 
KENANGA
Stock: 
Price Target: 
0.31
Price Call: 
SELL
Last Price: 
0.39
Upside/Downside: 
-0.08 (20.51%)

PHARMA’s 9MFY23 results disappointed, registering a net loss of RM45m on inventory write-off. Separately, it announced several proposals to regularise its financial situation to lift itself out of PN17 status. We now forecast a net loss of RM41m in FY23F (from a profit previously) but keep our TP of RM0.31 and UNDERPERFORM call.

PHARMA reported a 9MFY23 net loss of RM45m against our full-year net profit forecast of RM34m and the full-year consensus net profit of RM42m. The variance against our forecast came largely from the write-off of inventories. No dividend was declared in this quarter which was within our expectation.

YoY, its 9MFY23 revenue rose 4% due to higher sales at its medical supply unit (+3%) and its Indonesia operation (+9%). However, its 9MFY23 dips into a loss of RM45m due to the write-down for: (i) slow moving expiring inventories namely personal protective equipment and needles (RM65m), and (ii) product development costs (RM7.6m) due to the non-commercial viability of the products.

QoQ, its 3QFY23 dipped into the red, registering a loss of RM49m compared to a profit of RM2m in 2QFY23 due to the write-offs as mentioned above.

Proposed regularization plans to exit PN17. Separately, PHARMA has proposed to regularise its financial situation in order to lift it out of PN17 status via: (i) proposed capital reduction of RM180m issued share capital, (ii) a rights issue of 1.18b new PHARMA shares at the ratio of 4 for every 5 shares held by existing shareholders together with 1.18b free warrants. In other words, a shareholder who owns 5,000 PHARMA shares is entitled to subscribe for 4,000 new shares and get 4,000 free warrants, and (iii) proposed a private placement of 714m new PHARMA shares or 26.9% of the enlarged issued share capital after the proposed rights issue.

For illustration purposes, (i) based on an indicative rights issue price of RM0.30/share and current share price of RM0.40/share, the theoretical ex-rights price is RM0.36/share, (ii) based on an indicative issue price of RM0.30/rights share and RM0.42/placement share will raise a combined RM655m which is earmarked for repayment of borrowings (RM264m), working capital (RM160m), and capex (RM220m), (ii) the RM264m will marginally improve PHARMA’s net debt of RM1.1b as at 30 Sept 2023 to a net debt of RM0.85b, and (iii) the enlarged number of shares will triple from 1.44b to 3.37b which will be EPS dilutive.

Outlook. We remain cautious on PHARMA due to: (i) the negative shareholders’ equity of RM264m as at 30 Sep 2023 impeding its ability to give out dividends, and (ii) the government seeking better value-for-money contracts and PHARMA might have to offer new rates that are more competitive (which we have reflected in our forecasts).

Forecasts. We now forecast a loss of RM41m in FY23F compared to a profit of RM34m but keep our FY24F numbers.

We maintain our TP of RM0.31 based on 10x FY24F EPS, at a 35% discount to the average of its peers due to its PN17 status. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Reiterate UNDERPERFORM.

Key risks to our call include: (i) it bagging new government concessions, (ii) its PN17 regularisation plan being less dilutive to existing shareholders, and (iii) privatisation at a significant premium to the current market price.

Source: Kenanga Research - 30 Nov 2023

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