KOTRA’s FY24 results met expectations. Its FY24 core net profit declined 32% on reduced sales and the resulting loss of operating leverage, coupled with absence of deferred tax benefit. However, we remain upbeat on KOTRA on recovering consumer spending, taking encouragement from QoQ sales rise. We maintain our forecasts and TP of RM5.35, reiterating our OUTPERFORM call. The stock offers a 6% dividend yield.

Its FY24 net profit met expectations at 102% and 95% our full-year forecast and the full-year consensus estimate, respectively. A 2nd interim dividend of 13.0 sen was declared bringing FY24 DPS to 25.5 sen which is within our expectation.

YoY, its FY24 revenue fell 7%, we believe as consumers held back purchases on weak spending sentiment. Its EBITDA margin fell by a steeper 14% on diminished operating scale, both at production and marketing, on the reduced sales volumes. Its FY24 net profit declined by 32% due to normalised effective tax rate of 21% (due to depletion from utilisation of deferred tax assets) compared to 2% in FY23.

QoQ, its 4QFY24 turnover rose 7% due to higher local and export sales. Furthermore, the EBITDA and PBT improved 18% and 20%, respectively, we believe, due to an improved product mix with higher-margin products. Its net profit rose 83% boosted by a lower effective tax rate of 26% compared to 51% in 3QFY24.

Outlook. We expect consumer sentiment to gradually improve over the course of FY25 once clarity emerges over subsidy rationalisation especially for RON95, and resumption of spending behaviour after an initial adjustment period. For now, a 7%-15% hike in the salary of civil servants from Dec 2024, and a gradual pick-up in the local economy and job market in-line with the recovery in the global economy is providing support.

Meanwhile, the expanding domestic OTC market should also augur well for KOTRA (its OTC products account for 50% of its top line). The out- of-pocket healthcare spending in Malaysia at private pharmacies has grown at a 10-year CAGR of 11%.

Forecasts. Maintained FY25F forecasts and introduce our FY26F numbers.

Valuations. Our TP of RM5.35 is based on 15x FY25F EPS, in line with its peer average. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3).

Investment case. We continue to like KOTRA for: (i) the bright prospects of the over-the-counter (OTC) drug market, (ii) its integrated business model encompassing the entire spectrum of the pharmaceutical value chain from R&D, product conceptualisation to manufacturing and sales, and (iii) the superior margins of its original brand manufacturing (OBM) business model (vs. low-margin contract manufacturing) with established household brands such as Appeton. Maintain OUTPERFORM.

Key risks to our recommendation include: (i) failure in clinical trials scupper new products break-through, leading 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.

Source: Kenanga Research - 20 Aug 2024