This article first appeared in The Edge Financial Daily on August 27, 2019
Pharmaniaga Bhd
(Aug 26, RM2.57)
Maintain buy with a higher target price (TP) of RM2.95: Pharmaniaga Bhd’s second quarter ended June 30, 2019 (2QFY19) earnings came in at RM9.3 million. This brings it first half of FY19 (1HFY19) earnings to RM28.9 million which exceeds our but met consensus earnings estimates at 59.8% and 52.4% respectively. The 1HFY19 revenue and earnings rose by +15.6% year-on-year (y-o-y) and +25.8% y-o-y respectively, driven by the logistics and distribution (L&D) division.
Pharmaniaga’s L&D division’s revenue and operating profit for 1HFY19 registered a growth of +13.5% y-o-y (RM989.3 million) and +63.7% y-o-y (RM28.4 million) respectively. The improved performance was driven by better contributions from the non-concession business. This was further compounded by the lower effective tax rate which reduced to 27.1% in the 1HFY19 (versus 40.2% in 1HFY18).
Nonetheless, due to lower contribution from the concession business, the manufacturing division’s 1HFY19 operating profit declined by -19.3% y-o-y to RM29.1 million. Meanwhile, its Indonesian operation recorded a commendable performance for 1HFY19 with an operating profit growth of +32.7% y-o-y to RM8.3 million.
Pharmaniaga declared a second interim dividend of 2.5 sen per share (versus 2QFY18 four sen) for the quarter under review. This brings the cumulative dividend declared so far to 8.5 sen per share (versus 1HFY18 nine sen).
We are revising our forecasted FY19 (FY19F) and FY20F earnings upwards by +5.6% and +7.7% to take into account the: i) improved performance of the non-concession business; and ii) lower effective tax rate.
We are revising our TP to RM2.95 per share. This is premised on pegging revised FY20F earnings per share of 21.1 sen at target price-earnings ratio (PER) of 14 times which is the average of its historical two-year rolling PER.
Pharmaniaga’s 10-year concession agreement with the government is slated to end in November. There is a mounting concern over a non-renewal of the concession agreement contract as Pharmaniaga is viewed to be having monopolistic position.
Nevertheless, we believe that there is a fair chance that the concession business will still be awarded to the company given: i) its years of experience and expertise in the logistics and distribution business; ii) the huge amount of investment to ensure efficient deliveries; and iii) the massive savings enjoyed by the ministry of health from Pharmaniaga’s handling capability.
We estimate that it will take up at least four years for other competitors to reach the same capability. In addition, the group has renewed its focus on its non-concession business by strengthening business synergies between its Indonesian subsidiaries to expand its presence in the Indonesian market which has led to an improved performance during the quarter.
We expect these will help to support the group’s earnings going forward. In addition, the stock commands an attractive dividend of more than 6% in comparison with its peers. All things considered, we maintain our “buy” on the stock. — MIDF Research, Aug 26