CIMB Research starts coverage of YSP Southeast Asia with Add rating

YSP Southeast Asia has an extensive range of largely own-brand products that includes generic medical drugs, over-the-counter (OTC) items, aquatic and veterinary drugs.

KUALA LUMPUR: CIMB Equities Research has initiated coverage of drug maker YSP Southeast Asia with an Add rating and sum-of-parts based target price of RM3.50, which is 30.1% above the last traded price of RM2.69. 

It said on Friday YSP is primarily a maker of generic medicines and it is the country’s fourth-largest listed drug producer, by market cap. 

YSP has an extensive range of largely own-brand products that includes generic medical drugs, over-the-counter (OTC) items, aquatic and veterinary drugs. 

The company also has a trading arm that retails various low-volume products, such as traditional Chinese medicine (TCM). YSP has three production plants: one each in Malaysia, Indonesia and Vietnam. 

“In our sum-of-parts, the pharmaceutical business is valued at 14.2 times CY18F P/E (at a 20% discount to CIMB’s pharmaceutical sector historical five-year mean of 17.7 times), to which we add net cash of 48 sen a share. 

“We advocate that investors accumulate this stock, given its strong earnings prospects and undemanding valuations. Downside risks to our view: sharp decline in sales volume and longer-than-expected product registration in export markets,” it said.

Currently, generics comprise 60% of total drugs sold in Malaysia (vs. more than 75% of drug sales in the US and UK), of which 30% are produced locally and 70% imported. 

CIMB Research believes generics sales will continue rising in tandem with more product offerings, as users switch to generics for cost reasons. 

This will also be spurred by the private healthcare spending that is growing at a faster clip than government healthcare spending. YSP is set to benefit from this trend as sales to private general practitioners and hospitals made up 50% of its FY16 sales. 

“YSP SAH expects rising contribution from exports to be its key earnings driver moving forward. Its key growth markets are in Asean, mainly countries with large populations and low penetration rates. 

“YSP aims to continue registering more products in each market and increase competitiveness via wider product offerings. 

“Margins should improve from better economies of scale as production increases. In particular, its Vietnam animal drugs plant, running at a low utilisation rate of 30% in 2016, should be a beneficiary,” it added. 

YSP trades at 12.7 times CY18F P/E, a 28% discount to CIMB’s healthcare sector target CY18F P/E of 18.4 times, despite consistently posting superior margins (gross to pre-tax level) versus most of its pharmaceutical peers. 

“We attribute YSP’s better numbers to higher cost efficiency and more profitable product mix (OTC, TMC & animal drugs).

“We project YSP three-year EPS compounded annual growth rate (FY16-19F) of 16.9%, driven by: i) rising export sales, ii) higher demand for generics in local market, and iii) turnaround in Vietnam operations,”  it said.