This article first appeared in The Edge Financial Daily on March 18, 2020

Duopharma Biotech Bhd
(March 17, RM1.16)
Upgrade to buy with an unchanged target price of RM1.71: On Covid-19, the management has seen a sales increase for some of its products and reaffirmed that there are no supply disruptions so far. For 2020, we expect sales to grow 12%, driven mostly by immune-boosting products such as vitamins. Duopharma Biotech Bhd is also confident of securing a government tender for its erythropoietin product worth RM10 million to RM15 million per annum.

However, take note that the group had yet to see any boost from a 6.6% year-on-year increase to RM30.6 billion in Budget 2020 allocated to the health ministry. This is largely due to the Covid-19 outbreak where the entire response is seemingly funded via the current operational healthcare budget instead of a special budget for Covid-19. Positively, Duopharma secured about 30% of its 2020 sales from the recent extension of its insulin and approved products purchase list contracts from the government.

The group’s highly active pharmaceutical ingredient (Hapi) plant in Glenmarie commenced operations in the first quarter of 2020, manufacturing its first Hapi product. The second Hapi product is expected to commence in May.

Its Klang plant expansion is on track to be completed in 2021. To recap, the expansion will enlarge production capacity by approximately 40% to 50% and house the manufacturing of oral solid dosage and specialty products.

Despite the recent strengthening of the greenback against the ringgit — 30% of its cost of goods sold, which will result in a higher cost of raw materials — we believe Duopharma’s profit before tax (PBT) margin will remain flattish at 12.4% in the financial year ending Dec 31, 2020 (FY20) versus FY19’s 12.3%. This is due to better operating efficiency and higher margins from its oncology segment. Take note that 8% of its revenue is denominated in US dollar, helping cushion some of its greenback exposure.

Key takeaways from Duopharma’s investor relations briefing via live streaming include: Sales will continue growing in 2020; expansion plans are on track; and its PBT margin will remain stable. Our earnings estimates are unchanged. At the current level, its dividend yield appears attractive at 5% for FY20. — TA Securities, March 17