Investment Highlights

• We upgrade Apex Healthcare (Apex) to BUY from HOLD with a higher fair value (FV) of RM3.12/share (from an earlier RM2.95/share), based on FY25F target PE of 22x, at 1 standard deviation above to its 5-year average of 18x. No ESG-related adjustments based on our neutral 3-star rating.

• We raise FY24F-26F earnings by 5%-7% due to a 2%-point increase in manufacturing margin assumptions as 1HFY24 core net profit of RM44mil came in above expectations, accounting for 53% of our earlier full-year forecast and 59% of street’s.

• Apex declared a higher 2QFY24 dividend of 3 sen (+0.5 sen YoY), which translates to a payout ratio of 49% vs. our current assumption of 42%.

• On a YoY basis, Apex’s 1HFY24 core earnings decreased by 13% despite a 6% revenue increase mainly due to the negligible contribution by associate Straits Apex Group as its effective stake fell to 16% from 40% in 1H2023, further exacerbated by financing costs and amortisation of identified intangible assets for Next Ortho Investment Holdings amounting to RM2mil.

• The manufacturing division accounted for 70% of 1HFY24 pretax profit, distribution 27% and corporate 3%.

• Sequentially, Apex’s 2QFY24 core earnings rose by 19% notwithstanding a mild revenue decline of 3.8% due to a 1%- point improvement in gross margin to 23.5%, largely driven by a resilient manufacturing segment, coupled with a 7% reduction in selling & administration expenses.

• We expect 2HFY24 revenue trajectory to remain steady as the group has introduced 9 new products in branded probiotics, gastrointestinal medications, topical preparations for skin, nose and throat. Over the longer term, management expects improving economies of scale from the RM67mil acquisition of Cheng 2 industrial office and warehouse last month that could reduce rental charges while expanding capacity for the group’s existing product lines.

• Hence, pending further clarity from an analyst briefing later today, we maintain Apex’s FY24F-FY26F revenue growth of 7.0%-7.3%.

• The stock currently trades at a decent FY25F PE of 19x, below its 5-year peak of over 25x. Also, Apex offers a fair dividend yield of 2%.

Source: AmInvest Research - 22 Aug 2024