We remain optimistic on Duopharma’s growth prospects with catalysts from: i) recovery of consumer healthcare segment, ii) increase in contribution from the government sector and iii) higher healthcare budget allocation in 2024. We reiterate our Buy recommendation on Duopharma with an unchanged TP of RM1.47 based on a PE multiple of 16.0x CY24 EPS.

4Q23 Expected to be Boosted by Lower Tax

To recap, 9M23 net profit dipped 16.6% to RM44.1mn due to: i) weaker consumer healthcare (CHC) sales of 26%, ii) upward adjustment in electricity tariff, iii) weak Ringgit and iv) higher finance cost.

For 4Q23, we expect sales (RM167.5mn in 3Q23) to remain flattish QoQ. Positively, we expect profit to improve to RM16-18mn compared to RM9.0mn in 3Q23, driven mainly by investment tax allowance.

Growth Prospects Intact

We remain sanguine on Duopharma’s 2024 growth prospects as we believe the consumer healthcare segment has bottomed and sales to the government sector will increase. Management anticipates that CHC sales will begin to pick up gradually owing to the low base effect in 2023 and launch of new products.

From FY21 to FY23F, the government sector accounted for 43% to 45% of the group’s revenue. For this year, we note that the healthcare sector would receive a substantial allocation of RM41.2bn, reflecting an increase of 13.5% compared to the RM36.3bn allocation in 2023. As such, we expect the government sector contribution to increase and bring about 2 key benefits to the group.

Firstly, the new Approved Product Purchase List (APPL) contract is expected to be concluded by 1Q24. We view this as positive given that the APPL contract is currently carried out on a roll-over basis based on pricing and exchange rates set in 2017. Management shared that in the new APPL contract, the volumes would likely be higher than the current 50 SKUs. As far as pricing is concerned, we believe that it would be slightly higher as the new contract term is expected to be based on exchange rate of RM4.6-4.7/USD (vs. RM4.2-4.25 in 2017). Besides, we expect Insulin contribution to increase to RM90mn in FY24F (vs. about RM60-65mn in FY23F).

K3 Plant Ramp Up on Track

On the expansion front, management reaffirmed the progress of transfer of product to its new K3 plant in Klang, Malaysia is on track. To recap, the new K3 plant (+50% more capacity vs. K1) has received the certificate of completion and compliance in 4Q23. We gather that Duopharma is in the midst of transferring all K1 products to K3, which is expected to be running at 40-50% utilisation (vs. K1 utilisation of 80%), once fully transferred by 4Q24.

As for its Bangi facility which manufactures a wide range of Ethical and over-thecounter products, we understand that utilisation rate is at about 45-55%. We expect the Bangi plant utilisation rate to increase by about 2-5% upon the award of new APPL contracts.

Impact

No change to our FY23-FY25 earnings assumption

Valuation& Recommendation

We maintain our TP for Duopharma at RM1.47 based on a PE multiple of 16.0x CY24 EPS. Reiterate our Buy recommendation on the stock.

Source: TA Research - 23 Jan 2024