Pandemic blues

Former investment banker turned private investor Ian Yoong thinks there could be a buying opportunity if indeed there is positive news of a reversal of inventory impairments.

IT wasn’t that long ago, when a number of listed companies were racing to get involved in Covid-19 related businesses.

These included companies getting involved in vaccine production and distribution at a time when there were seemingly shortages of vaccines and growing demand for what was deemed as life saving therapy.

Then there were other listed companies that sought to get into the lower end of the Covid-19 related products such as face masks and personal protective equipment (PPEs).

Many of these companies enjoyed boosts to their share prices on Bursa Malaysia because of these ventures. In a few of those companies, their earnings also rose from getting involved in those businesses.

Fast forward to today, and a different picture is emanating. The biggest story in this regard was how Pharmaniaga Bhd, whose earnings during the pandemic period were boosted by its vaccine business, has now fallen under Practice Note 17 (PN17) that requires a regularisation plan.

The pharmaceutical group triggered the PN17 criteria after reporting a net loss of RM664.39mil in the fourth quarter ended Dec 31, 2022 (4Q22) – its largest ever quarterly loss owing to a massive provision of RM552.3mil for its slow-moving Covid-19 vaccine stock.

The disastrous 4Q swung Pharmaniaga into the red for the full year with net loss coming in at RM607.3mil for financial year 2022 (FY22).

Recall that Pharmaniaga had the mandate to supply Sinovac vaccines to the government during the pandemic.

It got into the Covid-19 vaccine business by inking a deal with China’s Sinovac Biotech Ltd in June 2021 to do the fill and finish of the Sinovac vaccine.

That of course led to Pharmaniaga gaining a lot of popularity among investors, sending its share price skyrocketing to a high of RM1.14 at the peak of its involvement in Covid-19 vaccines.

However, Pharmaniaga shares had succumbed to strong selling pressure following Tuesday’s news of its inclusion into PN17. It closed at 28 sen yesterday, translating to a market cap of RM359.8mil after having lost more than one-third in value this week.

A deep hole

The inventory write-off made a deep hole in the financials of parent company, Boustead Holdings Bhd, which holds a 51.85% stake in Pharmaniaga.

Boustead posted a 4Q22 net loss of RM402.3mil, dragging FY22’s net profit lower by 64% to RM62mil.

In a statement, Boustead’s group chief executive officer Izaddeen Daud described the write-down as “indeed deeply concerning”, although expressing confidence that Pharmaniaga remains a going concern.

Pharmaniaga has in the past been a major income contributor for Boustead and with a negative shareholders’ equity of RM249mil as at end-December 2022, analysts say this may impede the company’s ability to frank out dividends.

It may also need to seek equity fundraising to recapitalise and regularise its financial conditions, which would then require the “support” of Boustead and Lembaga Tabung Angkatan Tentera (LTAT).

The armed forces pension fund, which owns 59.42% of Boustead, also has a 8.6% equity stake in Pharmaniaga.

According to Pharmaniaga, it is engaging with various parties to sell its stockpile and there will be no more impairments. (see accompanying story).

This potentially to see a reversal of inventory impairments should Pharmaniaga be able to sell more of its existing Covid-19 stockpile, although some analysts think it will be challenging for the company to sell its vaccine inventory at meaningful prices.

More interestingly, fresh from reporting its large quarterly loss, Boustead announces on Thursday that LTAT is planning to take it private at 85.5 sen per share – about half its net tangible assets of RM1.64.

The fund is offering to buy all the remaining 822.51 million shares or 40.58% interest in Boustead and is expected to fork out RM703.3mil for the deal.

Is Boustead’s privatisation linked to what’s going on at Pharmaniaga? Some think so.

“The provision (on the unsold vaccines) basically wiped off the entire equity in Pharmaniaga and its announcement was a smoke for LTAT to take Boustead private at a super attractive and undervalued price, which is unfair to minority shareholders,” says one analyst, who wished to remain anonymous.

He says Boustead owns valuable assets, amongst them, a 20.9% stake in Affin Bank Bhd and 58% of Boustead Plantations Bhd.

The conglomerate’s stakes in Affin Bank and Boustead Plantations are valued at RM987mil and RM986mil, respectively, based on the current share prices of both companies.

“The market value of Boustead’s stakes in both companies are worth close to RM2bil, and yet LTAT proposes to take Boustead private at a market cap of RM1.72bil,” says the analyst who also wished to remain anonymous.

On the group’s debt, the analyst says that while Boustead has RM856mil in bank borrowings, its cash stood at RM165mil.

This equates to a RM691mil net debt position which can be paired down via the disposal of some assets in its stable, the analyst says.

Yesterday, Boustead shares saw a flurry of activity and was bought up to the takeover price of 85.5 sen a share or up 30.5% over the last traded price prior to the stock’s suspension to announce the privatisation.

Dealers say investors could be buying into the counter on the possibility that the fund may raise the offer price.

Coming to Pharmaniaga, most research firms have downgraded the stock to a sell given its uncertain outlook.

However, former investment banker turned private investor Ian Yoong thinks there could be a buying opportunity if indeed there is positive news of a reversal of inventory impairments.

According to Yoong, the counter’s price weakness could be due to selling by institutional funds as many are not permitted to own stocks designated as PN17.

But he says that the biggest concern is a potential cash call to lift shareholders’ equity back to levels above the PN17 threshold.

How others fared

Similarly, Solution Group Bhd and Hong Seng Consolidated Bhd, which had jumped on the vaccine-related business, also sunk into losses for the October to December 2022 reporting period.

Solution Group, which has an agreement with CanSino Biologics Inc to collaborate on the manufacturing and commercialisation of the latter’s Covid-19 vaccine, reported a net loss of RM31.45mil for 4Q22 after it made an impairment of its slow-moving Covid-19 vaccine stock.

This brought the company’s full year losses to RM39.4mil as compared to a profit of RM32mil in FY21.

The ACE Market-listed company says it is “prudent to provide full impairment on the vaccine stock in its inventory, which consists of finished products and drug substance” due to the low demand for the vaccines and remaining shelf life of about 10 months.

This was due to the low demand for Covid-19 vaccines and the remaining shelf life of about 10 months.

The company says there are some prospects for a new product known as Convedicia Air, which is the world’s first inhaled Covid-19 vaccine.

Considering the composition of the drug substance for inhaled vaccine is the same as the intramuscular version, Solution Group believes its existing stock could be used to formulate and manufacture the inhaled vaccine that is said to have minimal side effects as compared to the intramuscular version.

It is also diversifying its operations and is currently exploring deals to expand its solar business, amongst others.

Likewise, Hong Seng is also recalibrating its strategies with the return to normalcy post-Covid.

The company has three divisions – glove manufacturing, medical and healthcare and financial services.

During the pandemic, demand for Covid test kits and gloves drove Hong Seng’s FY21 profitability to a record high, fuelling investor interest that saw the counter’s market value hitting over RM9bil. However, its market cap has since come down to RM689.6mil as investor sentiment waned towards pandemic beneficiaries.

The company posted a net loss of RM6.8mil in the first quarter ended Dec 31, 2022, after experiencing losses in the healthcare and glove segments.

With sales of Covid-19 test kits normalising, Hong Seng has begun to expand its healthcare business to provide post-pandemic general healthcare-related products and services such as providing laboratory diagnostic services, genomics and biochemistry screening.

As for gloves, it continues to see headwinds due to the oversupply situation and from rising operating costs.

Hong Seng recently acquired a 51% stake in eKYC firm Innov8tif Holdings for RM30.9mil.

It views the business of digital identity assurance and verification solutions as a fast-growing sector as more organisations embrace cloud computing and undergo digital transformations.

The company is also looking at electric vehicles (EV) and recently proposed to acquire Alliance EV Sdn Bhd, which is the EV business arm of CSH Alliance Bhd, for RM20mil.