PHARMA’s 1HFY24 results met our forecast. Its 1HFY24 core net profit jumped almost 5-fold on improved sales, efficiency gains and cessation of non-core units. We maintain our forecasts, TP of RM0.34 and UNDERPERFORM call. The stock remains under Practice Note 17 (PN17) status.

PHARMA’s 1HFY24 net profit of RM25.6m (+5-fold YoY) came in at 57% of our full-year forecast. Consensus estimate is unavailable. We consider the result to be within our expectation since seasonally 2H performance is lower than 1H. No dividend was declared in this quarter which is within our expectation.

YoY, its 1HFY24 revenue rose 4% due to higher sales from its Indonesia operation (+24%) which more than offset the poorer showing from its medical supply unit (-3%) and generic drugs division (-18%). Its 1HFY24 core net profit jumped almost 5-fold, thanks to operational efficiency gains through on-going inventory optimisation efforts, cessation of non-core and non-performing businesses and a lower effective tax rate.

QoQ, its 2QFY24 revenue fell 13% due to lower sales from its medical supply unit (-19%) with moderate orders from MOH but offset by better showing from generic drugs (+21%) albeit from a lower base. Its 2QFY24 net profit fell by a larger magnitude of 89% dragged down by, we believe, higher operating costs, mainly due to marketing and promotion expenses and poor economies of scale on a less-than- optimum sales volume.

Outlook. We remain cautious on PHARMA due to the negative shareholders’ equity of RM273m as at 30 June 2024 impeding its ability to distribute any dividend. Looking ahead, it is building four new warehouses, being part of a RM220m capex plan to be funded with proceeds from a rights issue and a private placement of new shares.This is to meet the requirement in relation to the government concession to provide timely delivery of drugs and non-drugs products to government facilities throughout the country. In the biopharmaceutical space, it is establishing manufacturing facilities for vaccines and insulin to cope with the increasing needs in these therapeutic areas. The project is on track for commercialisation for vaccines in 2025 and insulin in 2026.

Forecasts. Maintained.

Valuations. We keep our TP of RM0.34 based on 10x FY25F EPS which is at a 35% discount to the average of its peers due to its PN17 status. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Reiterate UNDERPERFORM.

Key risks to our call include: (i) it bagging more concessions from the government, (ii) its PN17 regularisation plan being less dilutive to existing shareholders, and (iii) privatisation at a significant premium to the current market price.

Source: Kenanga Research - 22 Aug 2024