Pharmaniaga selldown could run further in short term — analysts

This article first appeared in The Edge Financial Daily, on February 24, 2020.
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KUALA LUMPUR: Pharmaniaga Bhd’s first full-year loss since its listing in 1999 rattled investors last Friday, with some analysts saying the selldown could continue in the short term.

“There has been a great increase in positive sentiment over the healthcare sector in general lately. Consequently, once something happens [such as losses], investors will sell and move to other counters within the same sector, that they view as having such certainty,” said a fund manager who spoke to The Edge Financial Daily on condition of anonymity.

LeInves PLT chief investment officer William Ng, who is among those who expect the stock to face further selling pressure, noted however that there is not a lot of room for the counter to go down considering that it is already near its 10-year low.

Pharmaniaga, which derives a significant portion of its earnings from its government concession business, saw its share price close 14 sen or 6.86% lower at RM1.90 last Friday, bringing its market capitalisation to RM496.34 million. The stock earlier reached an intraday low of RM1.82.

Some 4.08 million shares were traded, exceeding the counter’s 200-day average trading volume of 208,039 shares by over 19 times.

Friday’s fall came after the group reported a net loss of RM149.22 million for the year ended Dec 31, 2019 (FY19), from a RM42.47 million net profit a year earlier. This was despite revenue rising 18.3% to RM2.82 billion from RM2.38 billion.

The loss was due to the recognition of the remaining RM247 million unamortised pharmacy information system (PhIS) — a proprietary system created as part of the government concession deal.

“The amortisation is a one-off non-cash expense and moving forward this will not affect our earnings,” Pharmaniaga’s outgoing managing director (MD) Datuk Farshila Emran told a media briefing after the results were announced.

A quick check on Bloomberg showed that there are four analysts covering Pharmaniaga, two of whom have issued “hold” calls, while one has a “sell” call and another a “buy” call. The consensus target price (TP) is RM2.11.

MIDF Research’s Nabil Zainoodin — who maintains the only “buy” call on Pharmaniaga with a higher TP of RM2.35, from RM2.27 previously — said he was upgrading the stock to “buy” from “neutral” considering it is now trading at an attractive forward price-earnings ratio (PER) of 10.4 times, which is 1.5 standard deviation (SD) below its three-year historical PER average and its dividend yield of 5%.

When contacted, Nabil said fundamentally the company has no issues, with a healthy cash level.

“There are no other players [that] can [provide] the same level of service as Pharmaniaga, particularly in the logistics and distribution (L&D) business, so the barriers to entry are high,” he said.

Nabil said the key performance indicators set by the health ministry are very strict. For example, medical supplies have to be distributed within seven days to remote areas.

Furthermore, the L&D business has only a 1.8% earnings margin, so not many other players would be keen to take up the same space.

In November last year, the government had put in a 25-month interim extension for Pharmaniaga’s medicine and medical supply contract, while awarding a five-year L&D contract ending 2024.

Farshila, in her media briefing, said the two concession contracts a will boost the group’s sales further and lead to another year of double-digit growth in FY20 revenue. This is also expected to translate to an improved bottom line, she said.

Kenanga Research’s Raymond Choo, however, is of the view that Pharmaniaga’s earnings visibility is cloudy beyond FY21.

“We maintain our FY19E/FY20E (estimated) earnings. TP is RM1.85 based on nine times FY20E EPS (earnings per share) which is -2.0SD below [its] five-year historical forward mean due to the cloudy earnings visibility beyond FY21. Reiterate ‘underperform’,” said Choo.

CGS-CIMB Research analyst Syazwan Aiman Sobri said he is maintaining his “hold” call and RM2.17 TP on Pharmaniaga, pending the outcome of an analyst briefing with the company last Friday.

Hong Leong Investment Bank analyst Farah Diyana Kamaludin noted that Pharmaniaga’s FY19 earnings before interest, tax, depreciation and amortisation fell 14.9% year-on-year due to lower contributions from its manufacturing segment as a result of lower take-up by the government.

“Coupled with the PhIS amortisation charge, this resulted in a core loss of RM123.9 million (FY18: core Patami [profit after tax and minority interests] of RM59.5 million),” she said, while maintaining her “hold” call and a TP of RM2.08 on the counter.