This article first appeared in The Edge Malaysia Weekly on May 24, 2021 - May 30, 2021

PHARMANIAGA Bhd and Duopharma Biotech Bhd recently declared a bonus issue amid subsiding interest in vaccine-related stocks as the delivery of Covid-19 vaccines has turned out to be much slower than anticipated.

The share prices of Pharmaniaga and Duopharma had retreated by 35.7% and 34.9% respectively since touching a peak in August 2020, and a bonus issue tends to boost trading liquidity and investor interest.

In the case of Pharmaniaga, its proposed four-for-one bonus issue propelled its share price to a high of RM4.46 last Monday, 28.17% higher than RM3.48 on May 7 — prior to the bonus issue news.

In contrast, Duopharma declined 3.4% to close at RM2.81 last Friday, despite announcing a one-for-three bonus issue, and strong first-quarter (1Q) earnings.

Year to date, both counters remain in negative territory, down 14% to 16%.

An analyst attributes Duopharma’s share price weakness to the delay in the conclusion of its vaccine supply agreement to end-May, which was announced prior to the proposed bonus issue.

The signing of the definitive agreement has been postponed several times since it was first announced in January 2021. The analyst believes Duopharma will be able to ink the deal by June.

But the clock is ticking, as Duopharma had signed an agreement with Putrajaya early this year to supply 6.4 million doses of the Russian vaccine Sputnik V within the year.

“There is a vaccine approval overhang in Duopharma. As long as that is not approved, it is hard to see a bonus issue having a positive impact on Duopharma shares. Technically, the bonus issue does not create any positive effect, but retailers like it because the share price will become cheaper,” another analyst tells The Edge.

“The sentiment on the stock is still largely dependent on the vaccine development, but its share price is well supported for now,” he adds.

While Duopharma’s valuation — the counter is trading at a forward price-earnings ratio (PER) of 25 times — is relatively higher compared with Pharmaniaga’s 21 times, the analyst says the former will be very attractive if it can manufacture vaccines in the future.

“If Duopharma is not able to get approval for its vaccine, then Pharmaniaga will be more attractive,” he notes.

On a full-year basis, he estimates the vaccine could contribute to about a tenth of Duopharma’s earnings.

Last month, Coordinating Minister for the National Covid-19 Immunisation Programme Khairy Jamaluddin said vaccines such as Sputnik V and Cansino were still being evaluated by the National Pharmaceutical Regulatory Agency and had yet to be registered.

As there are no indications as to when Sputnik V will arrive in Malaysia, the first analyst points out that it remains to be seen if Duopharma will be able to receive all 6.4 million doses by 4Q. Moreover, a growing number of countries have approved the Russian vaccine.

Notwithstanding the delay, Duopharma is expected to deliver an improved performance this year because of stronger government demand.

“Demand has not gone back to the pre-pandemic level, but it is encouraging to see strong 1Q results. Not just sales, but margins have also expanded owing to cost savings. The management quality is good,” says the analyst.

Duopharma’s net profit for 1Q ended March 31, 2021, expanded 29.9% to RM17.61 million, from RM13.56 million a year earlier, underpinned by higher sales in the consumer healthcare sector. Full-year net profit is projected at RM74.75 million versus RM58.61 million in 2020.

Recently, Putrajaya extended a contract for the supply and delivery of human insulin products by a year to December 2021, with an additional contract value of RM19.63 million.

Early last year, the contract period for the supply of pharmaceutical and/or non-pharmaceutical products to hospitals, clinics and others under the Malaysian government was also extended for 25 months until Dec 31, 2021.

Compared with Pharmaniaga, the first analyst points out,  Duopharma has been registering stable profits over the years.

“That’s why funds still prefer Duopharma over the long run,” he opines.

As Duopharma’s share price has almost doubled in the past year, he believes most of its future earnings have already been priced in.

“Contribution from the 6.4 million doses will not be very much. It is like a national service, they can’t overcharge the government,” he adds.

However, CGS-CIMB Research is of the view that Duopharma’s current valuations look attractive after its recent share price weakness, and has upgraded its call to “add” from “hold”, with an unchanged target price of RM3.67.

“Our target price is based on a CY22 PER of 28.8 times, where we take into account potential long-term earnings prospects from the development of vaccine manufacturing capabilities, which is a key rerating catalyst,” it said in a May 4 note.

As such, there is only one “buy” call on Duopharma against two “hold” and one “sell” recommendations, with a consensus target price of RM3.15. This represents an 11.3% upside to its closing price of RM2.83 last Thursday.

Compared with Pharmaniaga, Duopharma’s net debt was relatively lower,  at RM171.3 million as at end-March 2021, with a gearing ratio of 0.27 times.

Although major local funds such as the Employees Provident Fund (EPF) and Permodalan Nasional Bhd (PNB) have been trimming their stakes in Duopharma, the first analyst is not too concerned as their shareholdings are still higher than six months ago.

“I think it is more of a broad-based scenario. Not just Duopharma, other stocks have also been affected by selling activity. Probably it was due to profit-taking and not so much the company’s fundamentals.”

The EPF’s stake in Duopharma was reduced to 9.41% from 10.49% a month ago, while PNB pared its stake to 47.33% from 47.93%.

Duopharma owns and operates three manufacturing plants that are located in Klang, Bangi and Glenmarie, Selangor. It also has subsidiaries in the Philippines and Singapore.

Meanwhile, of the five analysts covering Pharmaniaga, two have “buy” calls, two have “hold” recommendations and one has a “sell” call, according to Bloomberg data. The consensus target price of RM4.07 for the stock points to a 2.4% downside bias.  

In January this year, Pharmaniaga announced that it had secured 14 million vaccine doses from China’s Sinovac Life Sciences Co Ltd for distribution in Malaysia.

Earlier, Health Minister Datuk Seri Dr Adham Baba said a total of 290,480 vials of Sinovac vaccine bottled by Pharmaniaga would be used at vaccination centres nationwide starting May 11.

Pharmaniaga saw its net profit grow 3.3% year on year to RM23.14 million for 1Q ended March 31, 2021. It reported a net profit of RM27.49 million last year versus a net loss of RM149.22 million in the previous year.

As at end-December 2020, it was in a net debt position of RM628.9 million, with a gearing ratio of 1.86 times.

Overall, both analysts believe the vaccine distribution business would provide recurring income for pharmaceutical players as multiple vaccinations may be needed — and on a recurring basis — even after herd immunity is achieved, with one of the analysts estimating the segment will give a profit after tax margin of 10% to 15%.

The government hopes to achieve herd immunity — or 80% of the population vaccinated — by end-2021 but health experts say the target is extremely ambitious given the snail-paced rollout of the vaccination programme.

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