CGS-CIMB upgrades Pharmaniaga, lowers target price to RM2

KUALA LUMPUR (March 9): CGS-CIMB Research has upgraded Pharmaniaga Bhd to “add” at RM1.72 with a lower target price of RM2 (from RM2.17 previously) and said the stock has turned positive due to its attractive valuations, improving earnings prospects due to higher manufacturing contribution and lower amortisation charges as well as attractive dividend.

The research house in a note today said Pharmaniaga recorded net losses of RM149.2 million due mainly to the full amortisation of the rights to supply the Pharmacy Information System (PhIS) to Ministry of Health (MoH) amounting to RM247.3 million, which is 95 sen per share.

“Excluding the large amortisation charge, Pharmaniaga’s FY19 EBITDA fell 14.9% y-o-y due to weaker manufacturing segment sales following a change in the government’s procurement policy, which now requires Pharmaniaga to share product manufacturing sales with other local manufacturers.

“While the latest extension of the concession agreement (CA) between MoH and Pharmaniaga was shorter at two or five years, the uncertainty lies in MoH’s plans for the CA after the interim period, such as open tender or self-undertaking,” it said.

CGS-CIMB said Pharmaniaga will continue to beef up its manufacturing and non-concession operations, which accounted for 49% of revenue in FY19, including expanding the sales of its manufactured drugs to the private sector and growing its presence in international markets.

In the note, it said Pharmaniaga has registered two new products in a European country, which is expected to be delivered starting in the first quarter of financial year 2020 forecasts (1QFY20F).

“We make adjustments to our FY20-22F EPS forecasts (+9.9% to -6.5%) to take into account of lower amortisation costs, lower margin assumptions for its logistics segment, and better sales but lower margin assumptions for its manufacturing segment,” said the research house.

At 12.24pm, Pharmaniaga shares were down 9 sen or 5.23% at RM1.63, valuing the group at RM425.8 million.