• Maintain BUY and DCF-derived TP of MYR1.44. Duopharma Biotech’s 2Q24 results feature core earnings of MYR17.4m, which takes the 1H24 figure to 48% of both our and Street full-year estimates. Results are in line with expectations, primarily driven by the renewal of the approved product purchase list (APPL) in May. Moving forward, DBB’s growth should be underpinned by higher budget allocations for healthcare and the commercialisation of high-value products in the niche therapeutic areas.

• Result overview. 2Q24 core earnings spiked 22% YoY, thanks to the increase in sales from the prescription pharmaceutical segment (in view of the renewal of the APPL contract in May), and the recovery in export sales – the latter, however, was offset by the subdued performance from the consumer healthcare (CHC) segment which posted a marginal contraction in turnover. Depreciation charges rose 18% YoY as its K3 production facility received the Certificate of Completion and Compliance or CCC in 2Q23. The transfer of processing machines from the K1 to K3 facilities are well on track, and should be completed by 2025.

• Margin overview. 2Q24 GPM contracted by 5ppt YoY, in view of the elevated electricity tariff rate as well as DBB being impacted by the strengthening USD vs MYR (c.5% YoY). The prices of its key raw materials, ie active pharmaceutical ingredients (API), are denominated in USD. Core margin contracted 0.5ppt YoY to 8% from higher depreciation charges and operational costs associated with the full operation of the K3 facility.

• Outlook. The recent weakening of the USD against MYR should bode well for DBB, since 50-60% of its cost of sales (for API) are in USD terms. DBB’s growth prospects should continue to be underpinned by: i) The conclusion of the APPL contract renewal with the Ministry of Health (with its product range extended to 86 items, vs 50 previously); ii) the revised APPL contract, which should more accurately reflect the latest USD/MYR rate (vs the previous rate of 4.2). Meanwhile, we expect sales growth from the private sector to continue being anchored by the pick-up in international patients numbers, the trend of an ageing society, and the rising trend of non-communicable diseases.

• Earnings estimates. We make no changes to our estimates pending further details in DBB’s upcoming results briefing. This counter is trading at an attractive 12.6x 2025F forward P/E, or 1SD below its 5-year historical mean of 17x. Our TP incorporates a 4% ESG premium, as DBB’s ESG score is two notches above the country median. Moving forward, we expect its growth to be underpinned by robust drug procurement activities from the public (as a result of higher budget allocation for 2024) and private sectors, as well as the renewal of its APPL contract.

Source: RHB Research - 16 Aug 2024