Pharmaniaga Bhd
(Aug 22, RM5.60)
Maintain reduce with an unchanged target price (TP) of RM5: Despite revenue growth of 10.8% year-on-year (y-o-y), Pharmaniaga Bhd’s first half of financial year 2016 (1HFY16) net profit declined by 30.5% y-o-y to RM33.4 million.

The weaker performance was attributed to higher amortisation charges from its Pharmacy Information Segment (PhIS), and the increase in overall finance costs to RM7.8 million.

As a result, 1HFY16 earnings before interest and tax margins slipped by 1.6 percentage points to 5.7 percentage points. Overall, Pharmaniaga’s 1HFY16 core net profit was in line with our expectations but came in short of the consensus number (42.2%).

In second quarter financial year 2016, both its logistics and manufacturing segments reported weaker performances.

The group’s logistics division, continuing to be affected by lower orders from government hospitals, once again slipped into losses. 

This division recorded a net loss of RM5.6 million at the pre-tax profit (PBT) level in the second quarter versus a loss of RM800,000 in the first quarter.

As for the manufacturing division, the group recorded a PBT decline to RM24.4 million due to lower demand for in-house products from its concession business.

Amortisation charges from the PhIS system will continue to be a drag on the group’s earnings.

In 1HFY16, amortisation costs rose by 85% y-o-y to RM18.2 million, and they are set to increase going forward.

As the group has only amortised up to RM68.5 million of the RM193.1 million spent on the system, amortisation is expected to be recurring and continue to impact earnings across the tenure of its concession agreement that ends in November 2019.

On a positive note, the group declared a dividend per share (DPS) of five sen, which brings 1HFY16 DPS to nine sen.

This translates into a 69.8% payout ratio, in line with our estimates of a 70% payout.

However, we believe current dividend yields of 3.4% to 4.5% for financial year 2016 (FY16) to FY18 are not attractive enough to warrant interest in the stock given various earnings risks in sight.

We believe that earnings will continue to be under pressure from higher amortisation charges for PhIS and an underperforming logistics division.

With no surprises to the results, we keep our earnings forecasts unchanged. Hence, our “reduce” call and 12-month sum-of-parts-based TP of RM5 remain.

While dividend yields of 3.4% to 4.5% would appear to be decent for a healthcare stock, we believe that risk-return is unattractive given the earnings risks. We prefer IHH in the healthcare space.

Upside risks are lower amortisation charges and a spike in government orders. —  CIMB Research, Aug 22