PHARMA posted 9MFY24 core net profit of RM35m, thanks to operational efficiency gains and cessation of non-core and non-performing businesses. We cut our FY24F net profit by 10% but keep FY25F earnings unchanged. While not out of the Practice Note (PN17) woods yet, due to the better outlook at the medical supply unit, we narrow the discount to peers applied to PHARMA for being under the PN17 status. We raise our TP to RM0.39 (previously RM0.34) and upgrade our call from UNDERPERFORM to MARKET PERFORM. The result of the regularization plan submitted to Bursa Malaysia is likely to be known by end-CY24 or early 1QCY25.

PHARMA's 9MFY24 reported PATAMI came in at RM130m, thanks to one-off reversal of penalty charges (RM94.9m at the net level) in relation to the concession business during the pandemic. This brings 9MFY24 core net profit to RM35m which came in at 70% of our full-year forecast. Consensus estimate is unavailable. We consider the result to be below our expectation since 4Q is seasonally a weaker quarter. No dividend was declared in this quarter which is within our expectation.

YoY, its 9MFY24 revenue rose 8% due to higher sales from its Indonesia operation (+18%) and from its medical supply unit (+5%). It returned to the black with 9MFY24 core net profit of RM35m compared to a loss of RM45m in 9MFY23, thanks to operational efficiency gains through ongoing inventory optimisation efforts, cessation of non-core and non-performing businesses and a lower effective tax rate. It recorded a one-off reversal of penalty charges (RM94.9m at the net level) in relation to the concession business during the pandemic in 3QFY24.

QoQ, its 3QFY24 revenue rose 23% due to higher sales from its medical supply unit (+35%). Its 3QFY24 core net profit of RM6.1m rose >100% from a low base in 2QFY24 due to better economies of scale on a more-than-optimum sales volume.

Outlook. The group anticipate further growth in the medical supply unit in 4QFY24 and in CY25, as the number of active products under the Approved Product Purchase List (APPL) is expected to increase from 655 products in 3QFY24 to 832 products by end-CY25. This expansion is projected to drive both sales and volume within the concession segment. A significant milestone was reached in its biopharmaceutical venture with the official launch of Malaysia's first local manufacturing plant on 9 Sept 2024. This facility exemplifies Pharmaniaga's capabilities in local manufacturing, supporting the Government's efforts in import substitution and supply security. In addition to this, the Group's flagship recombinant human insulin product received regulatory approval from the National Pharmaceutical Regulatory Agency (NPRA) in November 2024 and is expected to be supplied to government hospitals by 1QCY25.

Valuations. We cut our FY24F net profit by 10% due to the weaker-than-expected results but keep FY25F earnings unchanged. However, we raise our TP from RM0.39 (previously RM0.34) based on 12x FY25F EPS which is at a 20% discount to peers' average due to its PN17 status. We reduced the discount from 35% to 20% due to improvement in its medical supply unit. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Upgrade to MARKET PERFORM from UNDERPERFORM.

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

Result Highlight Quarterly segmental breakdown 2Q24 3Q24 Chg % 2023 2024 Chg % q-o-q 9M 9M y-o-y Revenue (RM m) Logistics and Distribution 545 736 35.0 1,860.9 1,948.9 4.7 Manufacturing 76 88 15.6 223.9 226.6 1.2 Indonesia 292 293 0.6 748.3 880.4 17.7 Eliminations (74) (87) 17.4 (218.5) (222.8) 2.0 Total 838.3 1029.8 22.9 2614.7 2833.0 8.4 Pre-tax profit / (loss) Logistics and Distribution (2) 128 NM (34.2) 153.8 (549.7) Manufacturing 3 12 359.6 (6.3) 23.2 (467.0) Indonesia 3 (1) (134.8) 7.2 3.9 (46.0)

Source: Kenanga Research - 27 Nov 2024