Key takeaways from Duopharma 4Q23 investor relations briefing include: i)expect 1Q24 to be higher QoQ, ii) delays to the APPL contract and iii) recovery of consumer healthcare segment. We cut FY24/25 earnings by 20.1/4.5% to RM70.6/88.4mn. Maintain Buy on the stock with a TP of RM1.47 based on a PE multiple of 16.0x CY25 EPS.

Review of FY23

Duopharma’s FY23 net profit declined 24.9% to RM52.6mn despite higher revenue of 1.1% to RM704.7mn. We attribute the weaker results to: i) lower revenue from the consumer healthcare segment of 25%, ii) higher electricity tariff, iii) higher finance cost and iv) overtime payments. In terms of sales mix, public and private sector contributed 44% and 48% of FY23 revenue respectively while exports accounted for 8%.

On a QoQ basis, 4Q23 revenue remained flat (-1.0%) to RM167.5mn but PBT dropped 38.4% to RM7.0mn due to higher depreciation and amortization as K3 commenced full operation. Positively, we expect sales to rebound in 1Q24 as December is typically the weakest month for public procurement of drugs. Overall, we are more upbeat on 2024, expecting the company to return to its growth trajectory. In our forecast, we project revenue and profit growth of 10.7% and 34.1% to RM780.1mn and RM70.6mn respectively in FY24.

Delays to APPL Contract

Recall that the new tender of drugs under the approved products purchase list (APPL) was supposed to be awarded by early 1Q24, but is now only expected to be awarded in March or April 2024, at the earliest which we attribute to the change in Ministry of Health (MOH) leadership. Positively, management shared that price negotiations have concluded and are now waiting for Surat Setuju Terima (SST) from the government. Currently, orders from hospitals/clinics are based on orders coming in, for replenishment (rather than restocking). As such, demand will likely be stronger in the short term as hospitals and the concessionaire have to restock once the SST is signed.

Despite the delay, we remain upbeat on Duopharma’s prospect as we expect to see a recovery in 2024 with the new contracts that the group will execute with the government. 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 RM4.70/USD (vs. RM4.2-4.25 in 2017). Note that the higher Budget 2024 allocation given to MOH amounting to RM41.2bn (+13.5% YoY) is expected to increase demand for medicines. Overall, we project Duopharma’s FY24 APPL contribution to increase to RM198mn from RM160mn in FY23.

Consumer Healthcare Segment Is Recovering

To recap, Duopharma’s consumer healthcare segment (CHC) had benefited from a surge in demand for its popular vitamin C brands, Flavettes and Champs during the pandemic years of 2020-2022. Thereafter, the demand tapered off as the country shifted to endemic phase, leading to lower CHC sales of 15% and 25% in FY22 and FY23 respectively. Management shared that CHC sales amounted to circa-RM100mn in FY23 and this is still 11% higher than prepandemic 2019 levels.

Moving forward, the group believes that there is potential for Uphamol, given penadol’s current market share of 80-90%. Besides that, management intends to rebalance its portfolio to build up its products other than Vitamin C, such as analgesics, eye care and skincare. As such, we believe CHC has bottomed and expect an organic recovery trend of 3% per annum.

Impact

We cut our FY24 earnings by 20.1% after lowering our sales assumptions by 5.5% and increasing depreciation rate by 1.5 pts. Meanwhile, we reduce FY25 earnings by 4.5% after lowering our sales forecast by 4.0%.

Valuation& Recommendation

Rolling forward our valuation base year to CY25, we maintain our TP at RM1.47/share based on an unchanged PE multiple of 16.0x EPS.

Source: TA Research - 8 Mar 2024