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This article first appeared in The Edge Financial Daily on March 25, 2019

Duopharma Biotech Bhd
(March 22, RM1.20)
Maintain buy with a target price (TP) of RM1.61:
Over the past two years, Duopharma Biotech (Duopharma) had seen robust revenue growth in all segments. In specific, supplies to the government sector recorded the strongest growth of average 52%, thanks to the three-year government contract to supply insulin to general hospitals nationwide worth RM300 million. The private and export sectors, meanwhile, also chalked up satisfactory growth, averaging 12% and 2% respectively over the past two years. In terms of revenue breakdown, the government sector remained the highest contributor with a 50% contribution to financial year 2018 (FY18) revenue, followed by the private and export sectors, which accounted for 42% and 8% respectively. In terms of revenue breakdown by product, the core product was insulin, which contributed 20% of the group’s FY18 revenue.

As highlighted in our recent report dated March 8, the first term of insulin contract will expire in November 2019. Meanwhile, the tender of the government contract of supply Erysaa, Erythropoietin (EPO) will be called anytime this year. In a management briefing, we understand that the company has engaged with the ministry of health for the two-year extension. The management is confident about the contract being renewed given its competitive pricing and the proven track record (delivery timing and quality) for the supplies of insulin over the past two years.

For EPO, the tender will likely be called before May 2019. Management believes the chance in clinching the contract is high, owing to competitive pricing and minimal competition. The estimated value of the contract is RM10 million to RM15 million a year. In our forecast, we have assumed the company to achieve insulin contract renewal and EPO contract. We estimate sales of drugs under the non-approved product purchase list, which cover insulin, and supply of EPO to contribute RM190 million or 35% to FY19 revenue.

As far as earnings are concerned, the contribution from insulin, EPO and other new niches (Trastuzumab for breast cancer and Daclatasvir for Hepatitis C) and over the counter products, coupled with the strengthening of the ringgit, are expected to boost FY19 earnings. We project FY19 earnings to grow by 9.8%. At the current share price, dividend yield remains attractive at 4.6% based on FY18. Given the rise in profit, we believe the group would pay out 70% of earnings as a dividend in FY19 (75% in FY18).

We increase our FY19, FY20 and FY21 earnings estimates by 5.6%, 2.3% and 0.5% respectively after adjusting our margins assumptions higher by about 0.8% and making some minor changes to our earnings model. We also tweak our dividend payout ratio to 70% from 50% previously.

We maintain “buy” on Duopharma with a higher TP of RM1.61 (previously RM1.52) based on unchanged 20 times calendar year 2019 price-earnings-ratio. We continue to like Duopharma for its strong market share in Malaysia, and move into niche pharmaceuticals products. — TA Securities, March 22

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