Hong Leong Investment Bank (HLIB) Research is maintaining its Sell rating on Pharmaniaga and target price of RM4.29, based on FY18 price-to-earnings multiples of 15.6 times , which is in line with the international peers.
It said on Thursday that despite Pharmaniaga’s monopoly in the government concession business, “we expect near term headwinds driven by lower orders and higher finance cost to drag earnings”.
HLIB Research said the uninspiring FY16 earnings (RM52.9mil, down 40.3% on-year) largely reflected the government’s move to rationalise its expenditure and shift towards a leaner procurement model.
“We expect the trend of slower government offtakes to follow through in FY17 as evidenced by the 2017 Budget healthcare allocation (RM4bil in 2017 vs RM4.6bil in 2016).
“Whilst the group has been working on a sleuth of measures aimed at diversifying its earnings base in the long run, which we are inherently positive on; its interim outlook still remains downcast by weaker demand from the concession business amidst a rising cost environment,” it said.
The research house said that to address immediate concerns, it expects Pharmaniaga to undergo an internal cost recalibration programme in FY17 to address some of the margin pressures it faces amidst the slower concession off-take (inventory optimisation and efficiency drive in its logistics department).
However, in the mid-term, it is upbeat on the prospects of Pharmaniaga’s venture into the Indonesian market, which augurs well for the group’s diversification strategy.
Pharmaniaga’s 55% stake subsidiary PT MPI has 31 distribution points across Indonesia as at FY16 and is in a strong position to benefit from the nation’s increasing demand for medicines.
GlobalData estimates that the Indonesian pharmaceutical industry is expected to grow to US$12.6bilin FY20 from US$7bil in FY15.
HLIB Research said furthermore, PT Errita (manufacturing) is well positioned to benefit from the JKN initiative; a universal healthcare programme which aims to provide 100% coverage to all Indonesian by 2019. This has fueled the demand for generic drugs in the nation. Indonesia accounted for 29% of non-concession revenue in FY16 (FY15: 23%).
“However, the success of their Indonesian ventures largely hinges upon the successful registration of the right offerings into the JKN system having passed the drug registration hurdle and conquering the logistical challenge that Indonesia presents.
“We anticipate advancements into the private sector in FY17 on the back of the low base effect. The group has turned its attention to capture a greater share of the private business domestically amidst waning concession orders.
“Despite its Indonesia and private sector segments having shown positive signs, we anticipate the near term prospects to remain challenging for the bread and butter business, as lower concession orders (FY16: 51% of revenues vs. FY15: 56% of revenues) drag earnings.
“Downside risks to the stock stems from lower than expected government offtake and a further depreciation of the ringgit,” it said.