Kenanga downgrades Pharmaniaga to underperform, slashes TP to RM1.60

KUALA LUMPUR: Kenanga research has downgraded Pharmaniaga Bhd from market perform to underperform after slashing its FY20 net profit forecast by 32% on an expected 18% contraction in revenue.

The research house reduced the group’s target price to RM1.60 from RM2.21 previously based on an unchanged 11x FY20E EPS (-1.5SD below 5-year historical forward mean).

This comes on the back of reports that the Health Ministry would implement an open tender system in place of concessions for logistics and distribution services for medical supplies.

With Pharmaniaga’s concession expiring at the end of the month, the group will have to participate in an open tender to secure the contract, which may lead to thinner profit margins due to competition.

However, there is a silver lining considering Pharmaniaga’s track record, platform and existing systems for the distribution of medical supplies, says Kenanga.

It added that the group’s earnings growth is expected to be propelled by its manufacturing division with a target of about 200 new products over the next 10 year to add to its existing portfolio of about 500 products.

“Overseas, its Indonesia operation remains a key area of growth, while further progress is being made in the European Union as the Group seeks to expand its global presence,” it said.

To recap, Pharmaniaga’s 10-year concession, which contributes to about 50% of Pharmaniaga’s revenue, started on Dec 1, 2009, and comprises the rights to store, supply and distribute approved drugs and medical products to government hospitals.

According to Kenanga, a significant element of the contract is the implementation of the Pharmacy Information System (PHIS) at 148 government hospitals and the Clinic Pharmacy System at over 1,200 clinics and district offices nationwide.

PHIS would facilitate the management of pharmacy services across the board whereby Pharmaniaga would provide support and maintenance for the system.

Source: TheStar