PHARMA (7081) - Pharmaniaga Bhd - Slower pace ahead
Target RM6.20 (Stock Rating: HOLD)
Pharmaniaga’s share price has had a good run. In the past 12 months, higher dividend and better earnings, driven by lower non-cash charges and stronger revenue, sent its share price to record highs. Most of the earnings’ upside, however, appears priced in. We downgrade the stock from add to Hold due to less attractive risk-reward. We fine-tune our earnings for FY15-17 to reflect the numbers from its latest annual report. Our target price increases to RM6.20 as we change our valuation method from 15.1x CY16 P/E to SOP to better reflect Pharmaniaga’s obligations to Ministry of Health (MOH). We prefer IHH for stronger earnings growth.
We downgrade the stock from add to Hold due to less attractive risk-reward. We fine-tune our earnings for FY15-17 to reflect the numbers from its latest annual report. Our target price increases to RM6.20 as we change our valuation method from 15.1x CY16 P/E to SOP to better reflect Pharmaniaga’s obligations to Ministry of Health (MOH). We prefer IHH for stronger earnings growth.
What lifted its earnings?
In FY14, Pharmaniaga paid a total dividend of 28 sen, 75% higher than in FY13. This, coupled with the 70% rise in net profit, sent its share price to an all-time high of RM6.25 last month. The strong earnings were driven by two factors. The first was higher revenue, which grew 9% yoy. Upward price revisions and higher offtake from MOH boosted the sales of both its logistics and manufacturing divisions. The second factor was the lower non-recurring expenses, such as amortisation charges, goodwill impairment, provision for bad debts and recognition of tax credits. We estimate the latter is a bigger driver and accounted for about 80% of the earnings growth last year.
Earnings growth prospects
It will be trickier for Pharmaniaga to repeat last year’s earnings growth as most of the low-hanging fruit have been picked. Its earnings could still grow in the low teens, helped by growing demand for pharmaceutical products in Malaysia, but to achieve stronger earnings growth requires a turnaround of its unprofitable small volume injectable (SVI) plant in Malaysia or higher contribution from its overseas ventures. Both will take at least 3-4 years to come through.
Changing to SOP valuation
Pharmaniaga also needs to spend an undisclosed amount for the Pharmacy Information System (PhIS) in MOH hospitals. The system will be fully funded by Pharmaniaga as part of conditions set in the concession agreement with MOH in 2011. It has spent about RM100m in the past four years and we estimate it may spend another RM100m in the next few years on PhIS. We have taken a conservative stance and assumed twice of that amount (RM200m) is needed. Every RM50m deviation from our estimate will change our target price by RM0.19.
Source: CIMB Daybreak - 03 April 2015
Target RM6.20 (Stock Rating: HOLD)
Pharmaniaga’s share price has had a good run. In the past 12 months, higher dividend and better earnings, driven by lower non-cash charges and stronger revenue, sent its share price to record highs. Most of the earnings’ upside, however, appears priced in. We downgrade the stock from add to Hold due to less attractive risk-reward. We fine-tune our earnings for FY15-17 to reflect the numbers from its latest annual report. Our target price increases to RM6.20 as we change our valuation method from 15.1x CY16 P/E to SOP to better reflect Pharmaniaga’s obligations to Ministry of Health (MOH). We prefer IHH for stronger earnings growth.
We downgrade the stock from add to Hold due to less attractive risk-reward. We fine-tune our earnings for FY15-17 to reflect the numbers from its latest annual report. Our target price increases to RM6.20 as we change our valuation method from 15.1x CY16 P/E to SOP to better reflect Pharmaniaga’s obligations to Ministry of Health (MOH). We prefer IHH for stronger earnings growth.
What lifted its earnings?
In FY14, Pharmaniaga paid a total dividend of 28 sen, 75% higher than in FY13. This, coupled with the 70% rise in net profit, sent its share price to an all-time high of RM6.25 last month. The strong earnings were driven by two factors. The first was higher revenue, which grew 9% yoy. Upward price revisions and higher offtake from MOH boosted the sales of both its logistics and manufacturing divisions. The second factor was the lower non-recurring expenses, such as amortisation charges, goodwill impairment, provision for bad debts and recognition of tax credits. We estimate the latter is a bigger driver and accounted for about 80% of the earnings growth last year.
Earnings growth prospects
It will be trickier for Pharmaniaga to repeat last year’s earnings growth as most of the low-hanging fruit have been picked. Its earnings could still grow in the low teens, helped by growing demand for pharmaceutical products in Malaysia, but to achieve stronger earnings growth requires a turnaround of its unprofitable small volume injectable (SVI) plant in Malaysia or higher contribution from its overseas ventures. Both will take at least 3-4 years to come through.
Changing to SOP valuation
Pharmaniaga also needs to spend an undisclosed amount for the Pharmacy Information System (PhIS) in MOH hospitals. The system will be fully funded by Pharmaniaga as part of conditions set in the concession agreement with MOH in 2011. It has spent about RM100m in the past four years and we estimate it may spend another RM100m in the next few years on PhIS. We have taken a conservative stance and assumed twice of that amount (RM200m) is needed. Every RM50m deviation from our estimate will change our target price by RM0.19.
Source: CIMB Daybreak - 03 April 2015
