This article first appeared in The Edge Financial Daily on November 17, 2017

Pharmaniaga Bhd
(Nov 16, RM3.80)
Maintain add with a lower target price (TP) of RM4.55: Pharmaniaga Bhd’s third quarter of financial year 2017 (3QFY17) revenue grew 10.9% quarter-on-quarter (q-o-q) to RM574.5 million, thanks to higher contributions from all its three divisions (manufacturing, logistics and distribution [L&D], and Indonesia). Yet, 3QFY17 net profit declined to RM3.6 million (-62.4% q-o-q), mainly due to: i) a spike in tax rate to 74.5% (70.6% points q-o-q), ii) lower offtake of in-house drugs, and iii) higher interest costs (31.3% q-o-q). We note that the spike in 3QFY17 tax rate was a result of under-provisioning in previous years that was recognised in the quarter.

Due to the weak 3QFY17 results, the nine months of FY17 (9MFY17) net profit of RM32 million was below expectations at 60% of our FY17. We attribute the 31% year-on-year (y-o-y) decline in net profit to: i) higher tax rates (seven percentage points  y-o-y), ii) lower contribution from the manufacturing segment, and iii) higher overall operating costs. This was despite 9MFY17 revenue rising to RM1.71 billion (more than 6.5% y-o-y) on higher sales in Indonesia and the L&D division. A dividend of five sen was declared in 3QFY17, bringing the 9MFY17 dividend to 13 sen, in line with our estimates.

Moving forward, the group should benefit from the higher allocation of RM4.1 billion (2.5% y-o-y) for the supply of drugs and consumables in Budget 2018. Moreover, we expect Pharmaniaga to supply more drugs to the health ministry from next year under the new Approved Product Purchase List. Also, the group is confident of securing a 10-year extension of its concession agreement with the health ministry that expires in 2019. Currently, talks are ongoing, with an outcome likely to be announced by 1Q of 2018.

Given that results came in below expectations, we are lowering our FY17 to FY19 earnings per share estimates by 7.2% to 9.6%. This is to account for: i) higher overall tax rates, ii) lower margins from the manufacturing segment, and iii) an increase in overall operating costs.  — CIMB Research, Nov 15