PHARMA guided orders to pick up in 3QFY24 following a weak showing in 2QFY24 due to the festive season. All in, it has guided for sustained profitability in FY24 driven by closure of non- performing businesses and efficiency gain through inventory optimisation efforts. We maintain our forecasts, TP of RM0.34 and UNDERPERFORM call. The group expects its Practice Note 17 (PN17) status to be lifted in 3QCY25.

The key takeaways from PHARMA’s post-2QFY24 results briefing are as follows:

1. PHARMA guided for orders to pick up in 3QFY24 at its medical supply unit following a weak showing in 2QFY24 (which we have factored into our forecasts) due to the festive season and delays in approved products purchase list (APPL) contract finalisation.

Specifically, it has guided that volume decrease in governmental contracts is expected to recover in 3QFY24 as more products will be procured under APPL. The group expect APPL product types to increase from presently 540 to >700 by end-CY24. Its 2QFY24 revenue fell 13% due to lower sales from its medical supply unit (- 19%) with moderate orders from MOH but offset by better showing from generic drugs (+21%) from a low base. To recap, its 1HFY24 net profit jumped almost 5-fold to RM28.4m on improved revenue (+4% YoY), efficiency gains and cessation of non-core units and non-performing businesses and reduced advertising and promotional expenses.

2. Its near-term profitability will be driven by: (i) closure of non-core and non-performing businesses involved in producing supplements and nutraceuticals products, and (ii) efficiency gain through on-going inventory optimisation efforts and aggressive payment collection.

Specifically, it has managed to keep tabs on fast-moving SKUs and reduce slow-moving stocks, which should reduce working capital requirements.

3. On the biopharmaceutical space, the group has achieved a key milestone following completion of the Pre-Filled Syringe (PFS) and Cartridge Line at its Vaccine & Insulin Production facility. This includes the successful procurement, installation, and qualification of critical machinery and equipment. The production line is currently undergoing process simulation, known as MediaFill, which validates and verifies the sterility of the production environment crucial step before the manufacturing of process validation (PV) batches which are scheduled between September and Dec2024.The Group had on May2024, submitted to the National Pharmaceutical Regulatory Authority (NPRA) the dossiers for three types of human insulin. In the area of vaccines product readiness, significant progress is being made. Agreements for technology transfer and antigen procurement for both the PCV13 and Hexavalent vaccines are progressing well.

These projects are on track to receive registration approvals by 2QCY26 and 4QCY27, respectively.

Valuations.We maintain our forecasts, TP of RM0.34 based on 10x FY25F 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 3).

Investment case.We remain cautious on PHARMA due to the negative shareholders’ equity of RM273m as at 30June 2024 impeding its ability to distribute any dividend.Reiterate UNDERPERFORM.

Source: Kenanga Research - 23 Aug 2024