KUALA LUMPUR (Nov 1): Selling of Pharmaniaga Bhd shares continues today as analysts downgraded the stock following news yesterday that Pharmaniaga's concession to distribute medical products for the Malaysian government will end this Nov 30.

News reports, quoting Health Minister Datuk Seri Dr Dzulkefly Ahmad, said there will be no more concessionaire for logistics and distribution (L&D) services for medical supplies, and an open tender system will be introduced instead.

At Bursa Malaysia today, Pharmaniaga's share price fell as much as 10 sen or 4.52% to RM2.11 in morning trades. At 10:26am, the stock was traded at RM2.14 with 437,000 shares traded.

Pharmaniaga's share price extended its drop today after closing down 29 sen or 11.6% at RM2.21 yesterday.

Today, Hong Leong Investment Bank Bhd and CGS-CIMB Securities Sdn Bhd are among research firms which downgraded Pharmaniaga's share target price (TP).

Both research firms, however, retained their Pharmaniaga earnings forecast pending more clarity from the government on the open tender for the supply for medical products.

Hong Leong's research team wrote in a note that it downgraded its Pharmaniaga stock recommendation to "hold" from "buy" with a lower TP of RM2.14 versus RM3.45 previously.

CGS-CIMB analyst Walter Aw wrote in a note that CGS-CIMB retained its "hold" call for Pharmaniaga with a lower TP of RM2.22 versus RM2.50 previously to reflect earnings risks from non-renewal of its concession agreement (CA).

Aw said Pharmaniaga's CA was last renewed in 2009 for 10 years and the current CA will expire by end-November 2019. "This news is a negative surprise to us," he said.

He said CGS-CIMB estimated the CA's total sales value was worth RM1.1 billion in 2018.

Today, Hong Leong's research team warned that Pharmaniaga's profit margin erosion is inevitable with competition in the picture.

"Despite our take that near-term earnings will be unaffected, we cannot discount the fact that uncertainty arises once the open tender model is implemented. Although we reckon that Pharmaniaga could retain its services in an open tender, margin erosion is inevitable with competition in the picture. In a nutshell, the reduced earnings clarity under the new model (vs the existing concession), prompts us to take a more bearish stance on our valuation parameters.

"When the open tender is called, we believe Pharmaniaga will have the upper hand for the job due to (the company) having a competitive advantage of being the expert in cold chain pharmaceutical logistics and distribution, with a historically proven track record of 25 years, supplying drugs and medical items to over 148 government hospitals and 1,300 government health centres encompassing urban and remote areas," Hong Leong's research team said.

CGS-CIMB's Aw said Pharmaniaga still has a competitive edge under the planned open tender system.

"We believe it could still win a large share of the L&D contracts under the new open tender system given its competitive edge," he said.