This article first appeared in The Edge Financial Daily on November 22, 2018

Pharmaniaga Bhd
(Nov 21, RM3.07)
Maintain buy with a higher target price (TP) of RM4.08: Pharmaniaga Bhd’s cumulative nine months ended Sept 30, 2018 (9MFY18) turnover of RM1,788.3 million (5.7% year-on-year [y-o-y]) translated into core profit after tax and minority interests (Patmi) of RM53.4 million (+36.1 % y-o-y), accounting for 87% of our and 81% of street’s estimates.

The declared third interim dividend of five sen per share brings year-to-date (YTD) dividend to 14 sen per share, as compared to 9MFY17 at 13 sen per share.

The interim dividend will go ex on Dec 3, 2018.

Revenue inched up marginally to RM587.7 million (0.8% quarter-on-quarter [q-o-q]) on the back of stronger contributions from Indonesia (revenue: +10.3%).

Earnings before interest, taxes, depreciation and amortisation (Ebitda) margin improved by 1.2 percentage points (ppts) (from 5.6% q-o-q) on the back of better costs management, while profit before tax (PBT) improved by (47.1%) on lower operating expenses (-22.7% q-o-q).

Consequently, an effective tax rate for the group of 12.9% (recognition of deferred tax) resulted in core Patmi improving by 60.6% to RM19 million.

Third quarter ended Sept 30, 2018 (3QFY18) revenue grew to RM582.7 million (+2.3% y-o-y) attributed to improved orders from government hospitals.

Ebitda margin improved by 0.9ppts to 6.9% on better cost management and the flow-on effects of a stronger ringgit y-o-y.

Improvement in core Patmi of RM19 million (+117.8%) y-o-y is also attributable to a higher tax base in 3QFY17 (around 74.5%) due to the reversal of under-provisioning in 2016.

YTD, Ebitda gained 9.4% to RM78.8 million on better cost management resulting in margins improving by 0.3ppts to 6.7%.  PBT improved to RM58.3 milliom (+9.6%) on lower operating expenses (-4% y-o-y). Core Patami improved 36.1% y-o-y after adjusting back for write-offs, provisions and foreign exchange amounting to RM14.4 million.

We tweak our forecast to account for more optimised operating costs moving forward. Our FY18 to FY20 earnings per share (EPS) increase by 9%, 3%, and 2%.

We maintain our “buy”call with a higher TP of RM4.08. Our TP is based on FY19 earnings pegged at a price-earnings (P/E) multiple of 15 times.

We highlight that the stock is trading at -1SD below its three-year historical mean or 11.8 times P/E.

Furthermore, we believe that at these levels the risk to upside ratio is attractive (upside of 39.1%).

Pharmaniaga remains competitive for the concession model due to: i) its expertise in logistics and distribution; ii) the margins from the concession business is not attractive (around 1%-2%) to attract other distributors who enjoy greater margins from distributing to the private sector; and iii) it is highly unlikely that with the current financial position of the government, it would undertake the necessary investments to return the drug distribution function back into public hands, which will require immediate ramp-up and less than 1% failure rate. — Hong Leong Investment Bank Research, Nov 21