Highlights

Announced the proposal to expand its pharmaceutical manufacturing arm to Kingdom of Saudi Arabia through JV with Modern Healthcare Solutions Co. Ltd. (Modern).

Headquartered in Ridyadh, Modern supplies healthcare products and services, engages in the retail business of medical equipment and accessories, imports / exports of products and marketing on behalf of third parties. Modern is exclusively owned by HRH Prince Turki bin Abdulrahman bin Abdulaziz and Engr. Abdulaziz F. AlHamwah.

Each will have equal equity interest in share capital of the Riyadh-based JV entity, namely Modern-Pharma Co. Ltd. with initial duration of 15 years effective from the date of its corporate registration.

The plant will be located in Sudair Economic City to produce, market and supply healthcare products and services in and to Algeria, Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Palestine, Qatar, Saudi Arabia, Sudan, Syria, Tunisia, Turkey and UAE.

Leveraging on Modern’s reputation and network, the firm expects to penetrate and capture the rapidly growing markets as part of the strategies to accelerate its growth. Also, the JV may offer opportunity for Pharmaniaga to gain a foothold in those markets which have attractive economic and demographic fundamentals in the mid to long term.

Risks: Regulatory (medical healthcare insurance policies and reimbursement schemes), social (labor disputes), political (civil unrest), economic, competition and FOREX.

In a separate filing, the ex-dates for both corporate exercises (share split and bonus issue) have been set on 31st May.

Financial Impact

50% stake will cost SAR500k (RM402k) which may be easily funded by internally generated funds.

Comments

While anticipating the conclusion of Indonesian acquisition, we welcome this development positively with little surprise as it managed to materialize the Memorandum of Collaboration which dated since Oct 2011.

Middle Eastern and African healthcare markets are poised to undergo a bullish growth along with economy. For example, Frost & Sullivan estimated Saudi Arabia’s healthcare expenditure to reach USD36.9bn in 2015 on the back of CAGR of 8.1% while UAE’s to reach USD21.3bn in 2016 at a CAGR of 15.2% between 2011 and 2016.

Catalysts

Gaining market share in non-concession and private sectors, synergistic benefits from acquisition, favorable FOREX, continuous effective operational strategy.

Risks

Political / regulatory / competitive / FOREX risks, failure / delay in drug delivery under CA, compliance to production standards / contamination and drug patent disputes.

Forecasts

Unchanged.

Rating

BUY, TP: RM10.92

• Positives - Synergy from acquisition, quarterly dividend, secured business outlook thanks to CA.
• Negatives - FOREX, high level of stock and gearing.

Valuation

• We reiterate our BUY call on the stock on the back of unaltered TP of RM10.92 based on 12.5x FY14 P/E multiple.

Source: Hong Leong Investment Bank Research - 21 May 2013