• Apex Healthcare (Apex) unveiled its proposal to acquire industrial land in Melaka for RM66.5mn.

• We think that this will have a positive impact on Apex's future earnings as manufacturing of in-house pharmaceutical products yields better margins compared to the wholesale and distribution division.

• We maintain our earnings estimates as this juncture

• Reiterate our HOLD call on Apex at TP of RM2.41, pegged against PER of -0.5SD of 5-year PER to FY24 EPS of 14.5sen

Proposed to acquire an industrial property in in Melaka

Based on Bursa announcement dated 1st December 2023, Apex Healthcare (Apex) unveiled its proposal to acquire industrial land in Melaka for RM66.5mn. A sale and purchase agreement for this acquisition has been executed by Apex's wholly owned subsidiary, Xepa-Soul Pattinson (Malaysia) Sdn Bhd, with Panasonic Appliances Refrigeration Devices Malaysia Sdn Bhd (PAPRDMY). The current industrial buildings on the premises have been evaluated as suitable for retrofitting to meet Xepa's manufacturing needs, thus effectively reducing the expense of new construction The timing of the Panasonic site's availability is opportune, as Xepa is presently in the process of reviewing plans for a significant expansion of its warehousing and liquid production capacity. To note, the industrial complex includes two primary factory buildings and additional ancillary structures erected on the land, boasting a combined builtup gross floor area of approximately 377,888 sqft. The anticipated completion date for the proposed acquisition is set for on or after 31 July 2024.

Our View

We are positive on the proposal, as we think that it will have a positive impact on Apex's future earnings, anticipating a meaningful contribution from this acquisition in 2025. Note that Xepa falls under Apex's manufacturing reporting segment and has been located in Cheng Industrial Estate since 1995. In terms of earnings contribution by segment, the manufacturing segment ranks as the second -largest for Apex at 26% of the group's revenue in FY23. The manufacturing segment consistently contributes between 21% and 27% to Apex's overall revenue for the past 5 years. It's noteworthy that the manufacturing of in-house pharmaceutical products yields better margins compared to the wholesale and distribution division and Liquid Production Plant's capacity utilization has exceeded 75%. Hence, in a medium term, we believe that increasing capacity in warehousing and liquid production will result in higher sales and eventually, an enhancement of the group's profit margins.

Earnings Forecast

No adjustments were made to our FY24-25F earnings projections at this juncture, pending more clarity from the group.

Maintain HOLD with TP of RM2.41

Maintain a HOLD call with an unchanged TP of RM2.41 pegged against PER of -0.5SD from the 5-year PER to FY24 EPS of 14.5sen. Going ahead we anticipate (i) Apex to record a flattish EBITDA margin due to the continuous increase in operating costs resulting from higher raw material costs and global inflationary pressure, as well as (ii) subdued sales for flu-related medication given declining flu cases in both Malaysia and Singapore post-pandemic.

Source: BIMB Securities Research - 4 Dec 2023