This article first appeared in The Edge Financial Daily on July 13, 2018
YSP Southeast Asia Holding Bhd
(July 12, RM2.48)
Maintain buy with an unchanged target price of RM3.70: Based on YSP Southeast Asia Holding Bhd’s past track record of securing contracts from the ministry of health (MoH), its chances have been low, that is less than 1% out of the government’s annual spending of RM4 billion. However, positively, with the potential liberalisation of MoH’s procurement process, this implies that there is potentially further upside to securing more of these contracts. Based on our estimates, an additional RM10 million in revenue from new contracts could potentially raise our financial year 2019 (FY19) earnings per share (EPS) estimate by 5%. YSP’s overall competitiveness, including an operating margin of 11.4% (second highest among listed peers), lends further credibility to its chances.
Potential implementation of new health scheme Peduli Sihat could prove to be an immediate boon to private pharmaceutical spending. It is expected to drive demand for generic drugs, benefiting generic producers such as YSP. To recap, the scheme involves assistance of RM500 annually to each Bottom 40% households nationwide. The pharmaceutical component could amount to about RM500 million or 10% of the existing RM5 billion of private pharmaceutical spending.
Current valuations appear undemanding at a 9.4 times FY18 price-earnings ratio (PER) multiple, below both its five-year historical PER average of 11 times (on a forward basis) and peer average of 13 times. We believe that our target price of RM3.70, based on an unchanged target PER of 14 times (+1 standard deviation of five-year average) on 2019 EPS more appropriately captures YSP’s improving underlying value, whereby catalysts will be driven by a potentially increasing export market (41% of total revenue by FY20) in the foreseeable future. — Affin Hwang Capital, July 12