KUALA LUMPUR (Sept 15): There is no immediate liquidity risk related to Pharmaniaga Bhd’s Practice Note 17 (PN17) status to Duopharma Biotech Bhd, as the company (Duopharma) has received payments related to the approved product purchase list (APPL) contract.
“Pharmaniaga has given its written commitment to fulfil its financial obligation to Duopharma, which has continued to receive payments from the former (Pharmaniaga) in relation to the awarded APPL contract,” RHB Research wrote in a note on Friday, following a briefing by Duopharma.
In 2017, Pharmaniaga had awarded the APPL contract to Duopharma, to supply pharmaceutical or non-pharmaceutical products to government hospitals and clinics.
The contract initially covered a three-year period from Dec 1, 2017 to Nov 30, 2019, before it was extended three times to June 30, 2023, and contributes approximately 20% of Duopharma’s annual revenue.
In May, Duopharma managing director Leonard Ariff Abdul Shatar said the company will likely receive another six-month contract extension in late June.
According to RHB, the tendering process for the new APPL contact has begun and is expected to be completed in the first quarter of 2024.
“We are positive with the development as the drug supply contract has been carried out on a rollover basis (based on 2017 terms), whereby the contract terms do not reflect the latest exchange rate,” said the research house.
RHB Research lowered its earnings guidance for Duopharma for the financial year ending Dec 31, 2023 (FY2023) to FY2024 by 10% to 12%, taking into account higher financing costs and depreciation charges related to the commercialisation of the K3 plant.
“We estimate that every 1% appreciation of the US dollar could potentially erode its earnings by 0.5%, given active pharmaceutical ingredients (denominated in US dollar) account for circa 50% of Duopharma’s total cost,” said RHB.
“Post certificate of completion of the K3 plant in 2Q2023, Duopharma expects to recognise potential tax savings of RM10 million by 2023 (although it has until 2026 to recognise it),” it added.
Despite maintaining its “buy” call, RHB trimmed its target price (TP) for the stock to RM1.38, from RM1.59 previously, to account for a 4% ESG (environmental, social, and governance) discount to its intrinsic value.
“Our TP implies 14 times FY2024F price-to-earnings, or -0.7 standard deviations from its five-year mean. We still like Duopharma, underpinned by its gradual increasing exposure to the private sector, strong presence in the local CHC (consumer healthcare) market, and better-than-peers’ margin profile,” it said.
At the time of writing on Friday, Duopharma shares were up one sen or 0.88% to RM1.15 sen, for a market capitalisation of RM1.11 billion.