This article first appeared in The Edge Financial Daily, on February 17, 2016.

Pharmaniaga Bhd
(Feb 16, RM6.17)
Downgrade to market perform with a revised target price (TP) of RM6.40: Pharmaniaga Bhd’s financial year 2015 (FY15) profit after tax and minority interests (Patami) of RM84 million (-10% year-on-year [y-o-y]) came in 18% and 23% below our and market consensus full-year forecasts respectively. The negative variance from our results was due to higher-than-expected promotional expenses and amortisation of the Pharmacy Information System (Phis). 

A third interim single-tier dividend per share of seven sen was declared, bringing its 12-month payout to 27 sen, which is below our full-year forecast of 29.9 sen. 

Fourth quarter of FY15 (4QFY15) revenue rose 29%, due to higher orders from government hospitals for its concession and non-concession businesses. However, profit before tax fell 6.4% to RM23.7 million, due to amortisation of the Phis and transportation costs, as well as higher-than-expected overhead expenses, such as marketing and promotion costs.

This brings 4QFY15 Patami to RM16 million (-19.8% quarter-on-quarter) exacerbated by a higher effective tax rate of 32%, compared with 21% in 3QFY15.

Y-o-y, FY15 net profit fell 10% to RM84 million despite flattish turnover primarily attributable to reduced government orders, amortisation of the Phis and increased promotional activities, but mitigated by lower manufacturing costs arising from ongoing cost optimisation and efficiency measures across the group’s manufacturing plants.

Pharmaniaga is a prime beneficiary for being the sole concession holder to purchase, store, supply and distribute approved drugs and medical products to 148 government hospitals, and 1,400 clinics and district offices nationwide. The concession agreement ends in 2019, and allows for upward revision of prices every three years.

We downgrade our FY16 net profit by 8% to take into account higher-than-expected operating costs and amortisation of the Phis.

We cut our TP from RM6.95 to RM6.40, based on unchanged 16.5 times FY16 earnings per share. The stock has risen by more than 50% since initiating our coverage report back in November 2014. Coupled with a lack of near-term catalysts, we downgrade our call on the stock from “outperform” to “market perform”. — Kenanga Research, Feb 16