Investment Highlights

• We reiterate BUY on Duopharma Biotech (Duopharma) with a higher fair value (FV) of RM1.52/share (from RM1.49/share previously) to reflect tax savings carried forward from FY23F to FY24F. Our FV is based on an unchanged FY24F P/E of 17x, at parity to its 5-year average. There is no ESGrelated adjustment based on our neutral 3-star rating.

• After an analyst briefing yesterday, we reduced FY23F core earnings by 3% to account for lower tax savings of RM8mil (from RM10mil previously) in 4QFY23F, but increased FY24F earnings by 2% to account for the balance RM2mil tax savings carried forward into FY24F. To recap, the total RM10mil tax savings stems from initial allowances on the capex of plant K3, which was commissioned in Jun 2023.

• Duopharma guided that 4QFY24 revenue and profit trajectory should be comparable to 2Q-3QFY23F as the Ministry of Health (MoH) does not spend much on medical procurement towards the close of the financial year in 4Q. Notably, the public sector accounted for 45% of 9MFY23 revenue.

• Moreover, based on market observation, the group remains cautious regarding the recovery of discretionary consumer healthcare (CHC) products in 4QFY23.

• On a positive note, Duopharma is slightly optimistic stepping into FY24F. We believe this is supported by:
  (a) Potential recovery in CHC products after an estimated contraction of 5% YoY in 9MFY23. CHC accounted for 26% of 9MFY23 revenue.
  (b) stronger government demand underpinned by a renewed approved product purchase list (APPL), coupled with higher government allocation to MoH in 2024 amounting to RM41.2bil (+13% YoY vs. 5-year (2018-2023) CAGR of 6%) which could provide further demand boost for medication from Duopharma.

• The group adhered to its previous guidance that the new APPL should be awarded by 1QFY24. The number of drugs in the contract should be higher than the previous list awarded back in 2017. It could mean ~80 drugs in this round vs ~50 previously. In terms of overall pricing, they should be similar or slightly higher than the previous list. The US$/MYR exchange rate will be at 4.6-4.7 vs. 4.2-4.3 previously while the duration of the renewed contract should be 2-3 years.

• Separately, we gathered that the K1 plant in Klang will be designated as a dedicated manufacturing facility for a particular drug ie. Penicillin, which MoH requires to be produced on a stand-alone basis. To recap, all production lines in K1 (other than Penicillin) will be transferred to K3 by end-FY24F. To minimise vacant areas in K1, the remaining building will be demolished and a replacement structure constructed to accommodate future production lines.

• For now, Duopharma indicated that the group has not yet experienced any payment delays from Pharmaniaga, which is still categorised under PN17.

• We continue to like Duopharma as the largest local pharmaceutical manufacturer which can leverage on several favourable long-term trends:
  (a) the rising take-up of generic drugs in Malaysia,
  (b) upcoming industry’s patent cliff in 2022-2026 and booming biosimilars with the company’s strength in R&D and state-of-art manufacturing facilities; and
  (c) ever-growing Vitamin C market with its popular brands, Champs and Flavettes.

• The stock currently trades at a compelling FY24F PE of 13.6x, which is 20% below the 5-year average of 17x. Dividend yield is also decent at 2.2%.

Source: AmInvest Research - 22 Nov 2023