Pharmaniaga Bhd
(April 24, RM4.81)
Initiating coverage with add call and target price of RM6.50: Our target price is based on 19.2 times calendar year 2015 price-earnings ratio (PER), a 20% premium over its three-year average forward PER in view of its strong earnings per share compound annual growth rate of 28.1% for financial year 2013 ended Dec 31 (FY13) to FY16.

We like its strong market positioning and manufacturing growth potential. Stronger earnings and higher dividends are potential catalysts, in our view.

Pharmaniaga is the largest Malaysian-listed pharmaceutical firm by market capitalisation. It has exclusive rights, through a concession agreement (CA) with the ministry of health (MOH), to purchase a set range of medical products and distribute them to medical institutions under MOH’s jurisdiction.

It also operates a manufacturing arm to make generic drugs, supplements and small volume injectables. Distribution used to be a bigger earnings contributor but was overtaken by manufacturing last year, as a result of improvements in efficiency and the injection of manufacturing assets by its parent, Boustead Holdings Bhd.

Healthcare spending in Malaysia is low by international standards. Rising affluence and improved access to healthcare services should fuel demand for medical products.

The group supplies 50% of the medical products purchased by MOH — the country’s biggest buyer of medical products — through its CA. Rising healthcare spending also provides opportunities to boost sales of its in-house products, which are more profitable than distribution.

It aims to launch 200 products over the next 10 years and has tripled its research and development spending since last year to speed up product development. The company is also keen to venture overseas. It recently acquired a drugmaker in Indonesia and is setting up a pharmaceutical plant in Saudi Arabia.

We project a jump in net profit of 43% year-on-year for FY14, led by higher manufacturing earnings and lower amortisation. This should lead to higher dividends of 18 sen per share, implying net dividend yield of 4.3%. — CIMB Research, April 23

This article first appeared in The Edge Financial Daily, on April 25, 2014.