KOTRA’s 9MFY24 results disappointed. Its 9MFY24 core net profit declined 39% on reduced sales and the resulting deterioration of operating scale, coupled with a higher tax. However, we remain upbeat on KOTRA given recovering consumer spending. We cut our FY24-25F net profit forecasts by 13% and 9%, respectively, reduce our TP by 9% to RM5.35 (from RM5.90) but reiterate our OUTPERFORM call.

Its 9MFY24 net profit missed expectations at only 64% and 57% our full- year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from a higher-than-expected effective tax rate of 19% as compared to our assumption of 9%. No dividend was declared which is within our expectation.

YoY, its 9MFY24 revenue fell 11%, we believe, as consumers held back purchases on weak spending sentiment. Its EBITDA margin fell by a steeper 13% on diminished operating scale, both at production and marketing, on the reduced sales volumes. Its 9MFY24 net profit declined by 39% due to higher effective tax rate.

QoQ, its 3QFY24 turnover fell 3% due to decreased export sales which more than offset higher local market volumes. However, its EBITDA and PBT improved 21% and 18%, respectively, we believe, due to an improved product mix with more higher-margin products. Its net profit fell 41% due to a higher effective tax rate of 51% (due to depletion from utilisation of deferred tax assets) compared to 2% in 2QFY24.

Outlook. We expect consumer sentiment to gradually improve during the year as and when more clarity emerges over subsidy rationalisation, especially in relation to RON95. Once put in place, consumers will gradually “come to terms” with it and resume spending in accordance with what they can afford. A 13% hike in the salary of civil servants from Dec 2024, and a gradual pick-up in the local economy and job market in-line with the recovery in the global economy will also help.

Meanwhile, the expanding domestic OTC market should also augur well for KOTRA. The out-of-pocket healthcare spending in Malaysia at private pharmacies (KOTRA’s OTC products accounts for 50% of its revenue) has grown at a 10-year CAGR of 11%.

Forecasts. We cut our FY24-25F net profit forecasts by 13% and 9%, respectively, largely to reflect a higher effective tax rate of 19%, compared to our previous assumption of 9%.

Valuations. Consequently, we reduce our TP by 9% to RM5.35 (from RM5.90) based on 15x FY25F EPS, in line with its peers’ average. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3).

Investment case. We continue to like KOTRA for: (i) the bright prospects of the over-the-counter (OTC) drug market, (ii) its integrated business model encompassing the entire spectrum of the pharmaceutical value chain from R&D, product conceptualisation to manufacturing and sales, and (iii) the superior margins of its original brand manufacturing (OBM) business model (vs. low-margin contract manufacturing) with established household brands such as Appeton. Maintain OUTPERFORM.

Key risks to our recommendation include: (i) failure in clinical trials scupper new products break-through, leading to the inability to recover cost incurred for the pre-clinical and clinical trials, (ii) its dependency on commercialisation of new products and slower-than-expected commercial operation of the new lab.

Source: Kenanga Research - 21 May 2024