• Still NEUTRAL, new MYR4.30 TP from MYR5, 7% upside. FY24 (Jun) earnings were below our and Street’s expectations due to the normalising demand trend towards health supplement products. While Malaysia’s economic growth is set to expand in 2H24 (as suggested by our economics team), we think Kotra Industries’ near-term earnings recovery should remain choppy given a potentially higher effective tax ahead (in the absence of tax losses to be recognised) and normalising consumer demand for health supplement products.

• Results. FY24 fell short of expectations after registering core earnings of MYR46m (-27% YoY) at 82% and 95% of our and Street’s full-year estimates. The YoY drop in core earnings were attributed to the decline in pharmaceutical product sales locally and overseas. 4QFY24 saw higher sales of supplement products in local and export markets, offset against a decline in pharmaceutical sales in domestically. The board declared a second interim dividend of MYR0.13/share, bringing its full-year FY24 total dividend payout to MYR0.28, representing a 93% payout ratio.

• Margins. FY24 core margin contracted 5.9ppts YoY to 20%, likely driven by an unfavourable product mix (higher export vs local sales) and elevated tax provisions in view of the reversal of deferred tax assets arising from the utilisation of tax losses and incentives brought forward. Elsewhere, Kotra’s opex as a percentage of total revenue edged up 3ppts YoY – likely on escalating cost pressures arising from the weakening MYR against the USD and higher electricity tariffs.

• Outlook. Following a better-than-expected trade performance (Malaysia’s 1H24 GDP growth of 5.1% YoY), our economics team expects the nation’s economic growth to expand by 5% YoY in 2024, driven by resilience in domestic demand on increased consumer and investment spending. While we remain positive on Malaysia’s economic prospects, we expect subdued near-term demand for consumer healthcare products as health awareness amongst consumers dissipates post the COVID-19 pandemic.

• Earnings estimates and valuation. We trim our FY25F-26F earnings by 11% and 14%, taking into account subdued consumer demand towards supplement products and a higher effective tax rate. Post adjustment, our TP is now lowered to MYR4.30 based on an unchanged 12x FY25F P/E or 0.2SD below its pre-COVID-19 5-year historical mean of 13x. Kotra is currently trading at 11x FY25F P/E. Our TP incorporate an ESG premium of 2% as the group’s ESG score is above our 3.0 country median. Key downside/upside risks: Spikes/declines in raw material prices, higher-/lower-than-expected consumer demand for supplements, and depreciation/appreciation of the MYR vs the USD.

Source: RHB Research - 20 Aug 2024