CGS-CIMB Research retains Hold for Pharmaniaga, unch TP RM2.17

  • Analyst Reports
  • Thursday, 21 Nov 2019

KUALA LUMPUR: CGS-CIMB Equities Research deems Pharmaniaga Bhd’s 9M19 core net profit of RM28.7m (-45.2% year-on-year) to be within expectations at 86% of its full-year estimates.

“We are positive on the extensions that Pharmaniaga secured from the Ministry of Health (MOH), but near-term earnings will be weighed down by higher amortisation charges for Pharmacy Hospital Information System (PHIS).

“Maintain Hold, with unchanged TP of RM2.17 (11.5 times CY21 P/E), ” it said on Thursday.

CGS-CIMB Research said Pharmaniaga’s 3Q19 core net profit came in at RM1.9mil (-90% yoy), bringing 9M19 core net profit to RM28.7mil (-45.2% yoy). This was after stripping out one-off gains in 9M19 of RM700,000 m, from write-off of receivables and inventories.

“We deem this to be in line with our expectations, at 86.7% but below Bloomberg consensus’ estimates (57.2%). No dividend was declared in 3Q19 (9M19: 8.5 sen/share); a negative surprise for us, ” it said.

Pharmaniaga’s 3Q19 revenue rose 19.1% quarter-on-quarter, from higher contribution from its logistic & distribution (L&D) segment and manufacturing businesses.

However, 3Q19 EBITDA margins declined 1.2 percentage points qoq, as a result of higher operating costs including non-recurring one-off expenses that was captured in the quarter, which the research house suspects to be RM5mil to RM10mil.

Accordingly, 3Q19 core net profit weakened 66.6% qoq to RM1.9m which was further aggravated by higher tax rates (90.3%, +64.5% pts qoq) and increase in interest expenses (+6.5% qoq).

In 3Q19, CGS-CIMB Research estimated that Pharmaniaga recognised amortisation charges of RM5.3mil (+6.3% qoq), bringing total 9M19 amortisation charges to RM15.2mil.

“We attribute the amortisation charges to the PHIS it had developed for MOH under the existing concession agreement. We expect Pharmaniaga to incur higher amortisation charges for PhIS in the upcoming quarters, given we believe that PHIS will be fully amortised in five years (RM208.3mil as at end 3Q19), ” it said.

Pharmaniaga recently announced that MOH has extended its contract to supply items under MOH’s approved product purchase list to MOH facilities for 25 months (Dec 1,2019 to Dec 31,2021) and a five-year contract extension to provide logistics and distribution (L&D) services for MOH (also under the APPL list) up to end-Dec 2024.

“While we are positive on Pharmaniaga securing a 5-year extension to provide L&D services for items under the APPL list to MOH facilities, we believe that the impact of higher amortisation charges for its PHIS system will continue to weigh on its near-term earnings prospects.

“Downside risk: sharp decline in margins for its L&D segment. Upside risk: longer amortisation period for its PHIS system, ” it said.

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