Pharmaniaga hits speed humps


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This article first appeared in The Edge Malaysia Weekly, on December 12 - 18, 2016.

 

PHARMANIAGA Bhd seems to have hit some speed humps of late. The group’s share price fell to a 52-week low of RM5.26 last Thursday, down 14% since the beginning of the year.

Analysts opine that the downward trend is probably due to the group’s weak performance so far this year. Pharmaniaga’s revenue has been lacklustre while net profit declined substantially this year due to high finance costs.

The integrated pharmaceutical group, which manufactures and distributes generic drugs, derives a significant portion of its revenue from the supply of pharmaceuticals to public hospitals and clinics nationwide under a concession agreement with the Ministry of Health.

In its 2015 annual report, the group says its concession agreement represents more than half of its revenue.

Its net profit for the nine months ended Sept 30 fell to RM46.44 million from RM67.98 million a year ago. For the third quarter ended Sept 30, net profit declined 34.6% to RM13.06 million from the previous corresponding period.

Revenue also saw a quarter-on-quarter decline this year. It fell from RM559.12 million in the first quarter ended March 31 to RM515 million in the third quarter ended Sept 30 due to lower demand from government hospitals. Nevertheless, it inched up 6.6% to RM1.61 billion for the cumulative nine-month period from the previous year. The increase was attributed to improvements in the group’s Indonesian operations.

Looking at the group’s books, it is no wonder that investors are not impressed. As at Sept 30, the group’s statement of cash flow highlighted a negative net cash flow generated from operating activities of RM138.41 million.

Pharmaniaga also seems highly leveraged with debts amounting to RM678.03 million and cash totalling RM34.31 million. This implies a net gearing of 1.15 times as at Sept 30. A year ago, it was 0.67 times.

Analysts are not too excited about Pharmaniaga, although the concession agreement is a source of steady income in good and bad times.

Kenanga Research downgraded the stock to “underperform” after the group released its third quarter ended Sept 30 earnings on the back of higher-than-expected operating expenses and lower-than-expected sales.

The research house says Pharmaniaga’s net margins for the cumulative nine months fell to 4%, compared with 6% a year ago, as a result of higher expenses incurred on promotional activities and R&D. The group also saw higher amortisation of its Pharmacy Hospital Information System (PHIS).

Earlier news reports have quoted Pharmaniaga chairman Tan Sri Lodin Wok Kamaruddin as saying that PHIS is set to be implemented in 1,200 government hospitals and clinics nationwide.

Says Kenanga Research, “We expect earnings to be lukewarm in subsequent quarters as well in anticipation of slower-than-expected general economic growth. Additionally, the roll-out of PHIS is expected to continue to dampen the bottom line over the short term.”

Meanwhile, Hong Leong Investment Bank Research, which maintained its “neutral” call on Pharmaniaga, says, “We like Pharmaniaga for its defensive qualities, monopoly of the government concession business and forays into Indonesia. Nonetheless, in the near term, we expect lower government orders and finance costs to drag down earnings.”

An analyst says Pharmaniaga’s concession business is likely to come under some pressure as the government is making spending cuts.

In Budget 2017, the government allocated RM4 billion for the supply of drugs, consumables, vaccines and reagents to government hospitals and facilities. This is RM600 million lower than the amount allocated in Budget 2016.

“Pharmaniaga’s earnings will be affected by the lower allocation for drugs as it is the supplier for government hospitals and clinics, unless it makes more headway in the private sector,” says the analyst.

Pharmaniaga is certainly making an effort to create more opportunities beyond the Ministry of Health’s concession business. It has won approval to manufacture drugs for countries in the EU and it intends to grow in Asean.

“Reviews of selected products are ongoing in order to complete the necessary registration. In tandem with this, we plan to mould our Indonesian manufacturing subsidiary,

PT Errita, into an important manufacturing and export hub for the Asean market,” the group says in its 2015 annual report.

Pharmaniaga’s largest shareholder is Main Market-listed Boustead Holdings Bhd, which holds a 56.33% stake. This is followed by Lembaga Tabung Angkatan Tentera, which has 10.04% equity interest.