• Maintain BUY and MYR1.41 TP (DCF), 12% upside. 1Q24 core profit of MYR17.9m came in at 21% and 22% of our and Street’s expectations. We deem the results as in line, as we expect the impact of the Approved Product Purchase List (APPL) to take effect in 2Q24. Moving forward, we see Duopharma Biotech’s growth being underpinned by higher budget allocations for healthcare, consumer healthcare (CHC) sales recoveries, and commercialisation of high-value products in the niche therapeutic segment.

• Results overview. 1Q24 core profit spiked 76% QoQ on seasonality, as 4Q is the Health Ministry’s (MOH) account closing period, which results in absence of public sales contributions for any given December. Both local and export sales booked QoQ revenue growth of 16% and 4% during 1Q24. However, YoY local sales dipped 6% – mainly attributed by subdued performances from the private (primarily insulin sales) and public – as the APPL contract was being executed on an ad-hoc rather than contractual basis, given that the contract was rolled over until Dec 2023 – sectors.

• Margins overview. 1Q24 GPM contracted 2.7ppts YoY, likely on upward revisions in electricity tariffs and DBB being hit by the USD’s strengthening, which drove active pharmaceutical ingredient (API) prices higher. We do expect profitability to improve gradually in view of the renewal of the APPL contract, as it allows DBB to pass-on the higher API costs to the Government.

• Outlook. We expect the recent conclusion of the APPL contract renewal with MOH to yield positive results to DBB, underpinned by the: i) Extended range of products (86 vs 50 under the previous contract) and ii) revised contract better reflecting the latest USD/MYR rate (vs the previous one’s 4.20). We also expect growth for CHC segment to revert to a steady state in 2024 (+12% based on our estimate, which is equivalent to the 10-year average growth of medical products retail sales domestically). Growth momentum from the private sector should continue to be anchored by the pick-up in international patients, ageing society trend, and the rising number of non- communicable disease or NCD cases.

• Earnings estimates. We make no changes to our estimates pending for further details in DBB’s upcoming result briefings. Maintain BUY with an unchanged DCF-derived TP of MYR1.41. Valuation are appealing, as the stock is trading at 14x 2024 forward P/E or 0.6SD below its 5-year historical mean of 17x. Our TP incorporates a 0% ESG premium/discount, as DBB’s ESG score is in line with the country median Moving forward, we expect the group’s growth to be underpinned by robust drug procurement by the public (as a result of higher budget allocations for 2024) and private sectors, as well as the recent APPL contract renewal.

Source: RHB Research - 27 May 2024