• Upgrade to BUY from Neutral, TP rises to MYR5.20 from MYR4.70, 16% upside with 7% FY25 (Jun) yield. We have a positive outlook for Kotra Industries after management provided us with an update. Earnings are set to grow by 31% YoY in FY25, premised on stronger sales of pharmaceutical products and easing raw material prices. The recent spike in influenza cases may lead to greater healthcare awareness, which should boost Kotra's neutraceutical sales. This counter is trading at 10x CY25F P/E, or 0.2SD below its 2-year historical average of 10.7x.
• Expecting stronger quarters ahead. According to the World Health Organisation (WHO), seasonal influenza tends to spread rapidly during the winter months in temperate areas. In tropical areas, the occurrence of influenza spreading is more irregular. In Malaysia, influenza detection rates have risen significantly since early 2H24, to exceed 20% vs the sub-10% levels booked during 1H24. This reflects a broader seasonal trend, which points to increased illness as well as heightened consumer awareness. In this context, we believe the rise in consumer health awareness will have a positive impact on Kotra's neutraceutical segment - particularly its vitamin products range (which help to boost the immune system).
• Capacity expansion. Kotra's new automated warehouse is set to be completed by the end of 2025. We note that its existing warehouse storage capacity has exceeded 90%. The completion of this new facility will help streamline inventory management, while reducing manual handling needs and, eventually, enhancing its inventory planning. Kotra also aims to add three new manufacturing lines to produce new items.
• Implications of diagnostic related group (DRG) measures. The Government recently touted the implementation of DRG measures to curtail medical cost inflation. We expect this to have a net positive impact on generic drug manufacturers - given their competitive edge in pricing over original brands. That said, Kotra is well-positioned to leverage on its pharmaceutical product line, which offers items related to paediatric care, anti-infection medicine and dermatological care, ie healthcare needs of children and the elderly.
• We raise FY25-26F earnings by 5% and 3%, with the expectation of stronger pharmaceutical sales ahead. We roll forward our valuation base year to CY25 from FY25, and raise our TP to MYR5.20, based on an unchanged 12x P/E. Our upgrade was premised on increasing consumer health awareness, stronger sales of pharmaceutical products, and easing raw material prices. Our TP incorporates an ESG premium of 2%. Key downside risks: Spikes in raw material prices, lower-than-expected consumer demand for supplements, and depreciation of the MYR vs the USD.

Source: RHB Securities Research - 20 Dec 2024