RHB Investment starts coverage on Duopharma Biotech, target price RM1.88

KUALA LUMPUR (Jan 8): RHB Investment Bank Bhd Research has initiated coverage on Duopharma Biotech Bhd with a "Buy" rating at RM1.58 and target price (TP) of RM1.88 and said it expects a 3-year earnings compound annual growth rate (CAGR) of 15%.

In a note today, the research house said this is mainly due to higher demand from pharmaceutical products – in line with rising health awareness, better efficiency from its new highly active pharmaceutical ingredients (HAPI) plant from first quarter of 2020 (1Q20) onwards, and improved export sales.

The research house said Duopharma Biotech’s cumulative nine months of financial year 2019 (9HFY19) earnings grew 30% year-on-year (y-o-y) to RM43.2 million on a 15% y-o-y improvement in revenue and higher 18.5% earnings before interest, taxes, depreciation and amortisation (Ebitda) margin (9HFY18: 16.5%).

It also said it expects a lower FY19 forecast (FY19F) dividend of 3.7 sen (FY18: 5.3 sen) before recovering to 4.2 sen in FY20F.

“The lower dividend is due to the need to fund the construction of new plants in Klang (K3 and K5). As the expansion will boost capacity by 50% in 2021, the benefits should outweigh the short-term lower dividend impact,” it said.

Furthermore, RHB IB said the group’s market capitalisation of RM1.08 billion is the highest among the listed pharmaceutical companies in Malaysia.

“Among the top 10 pharmaceutical companies in Malaysia, it has a market share of 28%. Duopharma is a market leader for vitamin C products via the Flavettes and Champs brands. Other products distributed/manufactured are for diabetes, hepatitis C, cancer and kidney disease treatments,” it added.

Moreover, it said one of the risks is Malaysia’s plan to regulate medicine prices. However, it believes that the government will allow certain market freedom instead of full-fledged drug price control, to ensure innovation and sustainability of the supply of quality medicines.

The research house said foreign exchange rate is also a risk as around 8% of sales are for export, while about 60% of costs are denominated in USD terms.

It also said that the group has a strong management team as its chief executive officer Leonard Ariff has more than 30 years of experience.

He was also the president of Malaysian Organisation of Pharmaceutical Industries (MOPI) from 2009 to 2014, it said.

Meanwhile, it added that the company’s chairman Tan Sri Datin Paduka Siti Sa’diah Sheikh Bakir has been in the healthcare industry for more than 40 years.

At 9.28am, shares of Duopharma Biotech fell 3.8% or 6 sen to RM1.52 with some 0.15 million shares traded.