New plants expected to up capacity of Duopharma Biotech in 2021

Duopharma Biotech Bhd
(Jan 8, RM1.54)
Initiate coverage with buy and a target price (TP) of RM1.88:Our TP implies 20.1 times forecast financial year 2020 (FY20F) price-earnings ratio (PER) (+1.25 standard deviation [SD] above its two-year average PER). The +1.25SD premium is justified on Duopharma Biotech Bhd’s market leadership, solid earnings growth prospects and strong management. We expect a three-year earnings compound annual growth rate of 15%, due to a higher demand from pharmaceutical products — in line with rising health awareness, better efficiency from its new high active potency pharmaceutical ingredients plant from the first quarter onwards, and improved export sales.

Its market capitalisation of RM1.08 billion is the highest among the listed pharmaceutical companies in Malaysia. Among the top 10 pharmaceutical companies in the country, it has a market share of 28%. Duopharma is a market leader in vitamin C products via the Flavettes and Champs brands. Other products that it distributes/manufactures are for diabetes, hepatitis C, cancer and kidney disease treatments.

Its cumulative nine-month FY19 (9MFY19) 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 (9MFY18 Ebitda margin: 16.5%).

We expect a lower 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.

Malaysia is planning to regulate prices of medicines. However, we believe that the government will allow some market freedom instead of a full-fledged drug price control to ensure innovation and sustainability of the supply of quality medicines. The foreign exchange rate is also a risk as around 8% of its sales are for export, while about 60% of costs are denominated in US dollar terms.

Duopharma group managing director Leonard Ariff Abdul Shatar has more than 30 years of experience, being the president of the Malaysian Organisation of Pharmaceutical Industries from 2009 to 2014. The company’s chairman Tan Sri Siti Sa’diah Sheikh Bakir has been in the healthcare industry for more than 40 years. —RHB Research Institute, Jan 8