This article first appeared in The Edge Financial Daily on November 20, 2017

YSP Southeast Asia Holding Bhd
(Nov 17, RM2.79)
Maintain buy with an unchanged target price (TP) of RM3.24: YSP Southeast Asia Holding Bhd’s third quarter of financial year 2017 (3QFY17) revenue grew by 12% year-on-year (y-o-y) to RM66.1 million, bringing the nine-month (9M) FY17 revenue to RM193.5 million (+9% y-o-y). This was mainly due to stable demand for its generic drugs which resulted in higher sales volume of YSP’s products in both the domestic and export markets. The manufacturing division continued to be the main growth pillar where it saw a 10% y-o-y growth in 9MFY17. The 9MFY17 net profit declined 6.5% y-o-y to RM15 million mainly due to one-off exceptional items, such as foreign exchange and inventory write-offs). Excluding the exceptional items, the core net profit came in at RM18.1 million (+18% y-o-y) and was broadly in line with expectations, accounting for 69% of our full-year estimates.

The 3QFY17 net profit margin was weaker at 5% compared to 6.8% in 3QFY16, mainly due to the higher exceptional item gains recorded in 3QFY16. The tax rate in 3QFY17 was also higher at 38.7% (versus 33.3% in 3QFY16) because of non-deductible tax expense. Excluding these effects, YSP’s core net profit increased from RM2.6 million in 3QFY16 to RM4.4 million in 3QFY17 as the management has managed operating cost well. Also, YSP’s Vietnam operations are showing a turnaround and the management expects it to break even in FY18, which we view will help to improve its margin in FY18.

We leave the earnings estimates unchanged for FY17-FY19 and forecast a 2017-2019 earnings per share (EPS) compound annual growth rate of 17% on the back of generic pharmaceutical growth in Malaysia and overseas sales. We maintain our TP of RM3.24 based on 14 times 2018 EPS. Trading at 12.5 times FY18 EPS, we think that YSP’s valuation is still attractive among the pharmaceutical peers listed on Bursa Malaysia, which trade at a weighted average price-earnings ratio of 18 times. — Affin Hwang Capital, Nov 17