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

Pharmaniaga Bhd
(Feb 22, RM2.61)
Maintain neutral with a revised target price of RM2.63:
Pharmaniaga’s full financial year 2018 (FY18) earnings came in at RM42.5 million, below our and consensus earnings estimates at 70.4% and 65.8% respectively.

FY18 revenue rose by 2.6% year-on-year (y-o-y) while earnings dropped by 21.2% y-o-y.

Pharmaniaga’s revenue for fiscal year of FY18 was higher at RM2.39 billion compared with RM2.32 billion in FY17, mainly due to the higher revenue contribution from the logistics and distribution (L&D) division.

The division’s revenue contribution rose by 6.3% y-o-y mainly attributable to the contribution from the concession business. This was partially mitigated by lower revenue from its Indonesian division, which dipped by 5.4% y-o-y in view of the depreciation of the ringgit against the Indonesian rupiah.

Pharmaniaga’s FY18 earnings fell by 42.5% y-o-y, mainly driven by finance costs (up 25.3% y-o-y) and tax costs (up 49.1% y-o-y).

The first was caused by a drawdown of about RM200 million in borrowing, a 51.8% y-o-y increase, while the latter was due to the underprovision of tax for prior years of about RM5.6 million.

In addition, a one-off compensation of about RM7 million in relation to a previous joint-venture company in China was also included in FY17.

Nonetheless, these were mitigated by the fall in operating expenses by 10.2% y-o-y driven by the L&D division which reflects its efficiency in distributing pharmaceutical products to public hospitals in clinics in Malaysia

Pharmaniaga declared a final dividend of two sen per share for the quarter under review. This brings its accumulated dividend for the year to 16 sen compared to FY17’s 19 sen.

Following the earnings announcement, we are revising our earnings forecasts downwards by 17.1% for FY19F to RM54.2 million as we input higher finance costs and a more conservative contribution from the concession business.

A key risk to our earnings forecasts would be non-renewal of government concession orders and lower-than-expected cost reduction. — MIDF Research, Feb 22

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