• D/G to NEUTRAL from Buy, new MYR1.34 TP (DCF) from MYR1.44, 8% upside. We came away from Duopharma Biotech’s post-results briefing feeling cautious. Despite in-line 1H24 results, we expect a softer 2H24 in view of seasonality. Sticky costs (higher staff costs and electricity tariffs) and subdued consumer demand for supplement products are set to weigh on DBB’s profitability, in our view. We imputed a 4% ESG premium to our TP, as the 3.2 ESG score is above the 3.0 country median.

• Key takeaways. A better-than-expected growth in the public sales segment was achieved in 2Q24 (+67% YoY) thanks to the renewal of the Approved Product Purchased List and new tender secured from the Government. Local private sector sales remained muted (+4% YoY), particularly because of lacklustre consumer demand for adult vitamin C products, offset by robust children’s vitamin C sales – eg Flavettes, Champs, and Proviton – and resilient performance from the ethical specialty wing. These have led to to the margin compression: -4.2ppts QoQ to 34.3%. All in, the revenue split between the public and private sectors was 54.5% and 39.3% vs 47% and 45% previously.

• Elevated costs still a key concern. The elevated staff costs as a result of minium staff wages and electricity tariffs incurred an incremental cost of MYR8-9m pa. Additionally, the effective tax rate rose to 24% for two consecutive quarters vs the 2-year average of 17% in 2022-2023 following an absence in tax- deductible expenses. We gather that there will not be any sizable capex spending moving forward, given that DBB just commissioned its K3 plant in 2Q23 (still undergoing the tech transfer process) while the K5 plant – which recently received its Certificate of Completion – is currently in the layout planning stage. There is no intention to commission it within the next 1-2 years.

• Expanding its presence in Indonesia. Following the Indonesian Government’s mandate on all consumer healthcare (CHC) products to be halal certified by 2030, DBB is in the sweet spot of being able to tap into a greater halal-certified pharmaceutical market outside Malaysia, as its products are 100% halal. Recall: Under DBB’s regional expansion, it had completed the setting up of a regional office in Indonesia in Apr 2023. It also conducted the official launch of Flavettes Glow (adult vitamin C) there in Jun 2024, with sales set to start kicking in meaningfully by 3Q24.

• Earnings adjustment and valuation. We cut our FY24F-25F earnings by 10% and 14% given the slower-than-expected CHC sales and margins compression arising from higher electricity tariffs and labour costs. Post adjustment, our DCF-derived TP is now lowered to MYR1.34, implying 17x FY25F P/E or 0.1SD below its 5-year historical mean. While we are optimistic on the potential pick- up in government spending (post Budget 2025), the ongoing cost pressure is expected to weigh on DBB’s profitability moving forward.

• Key downside/upside risks: Lower-/higher-than-expected sales volumes and weakening/strengthening of MYR against the USD.

Source: RHB Research - 26 Aug 2024