Vitamin C consumption bright spot for Duopharma during Covid-19 pandemic

KUALA LUMPUR (May 19): The Covid-19 outbreak has caused many people to stock up on Vitamin C as they seek to boost immunity in the ongoing pandemic, and this is a big plus point for a pharmaceutical player like Duopharma Biotech Bhd, whose sales of the supplement surged after Covid-19 infections began to rise in March.

“In Malaysia, DBB (Duopharma) is a market leader in Vitamin C products via the Flavettes and Champs brands. Historically, Vitamin C sales accounted for 10%-15% of DBB’s total sales,” RHB Research analyst Alan Lim wrote in a note today.

A change in consumer behaviour has certainly benefited Duopharma’s first quarter results, which Lim said were better than expected. RHB is therefore maintaining its “buy” call on the stock with a higher target price (TP) of RM1.95 (from RM1.83 previously).

The group posted a net profit of RM13.56 million for the first quarter ended March 31, 2020 (1QFY20), which slipped 6.25% from RM14.47 million as a result of higher unrealised foreign exchange (forex) losses. This was despite revenue growing 5.5% year-on-year to RM158.71 million, thanks to higher demand from the private health sector.

“We gather that the outperformance was caused by healthy sales to the private sector, as demand for Vitamin C products surged after Covid-19 infections broke out in March,” Lim said.

RHB foresees stable prospects ahead for Duopharma, backed by increased government allocations for the Ministry of Health.

“This bodes well for DBB, as half of its revenue is generated from sales of pharmaceutical products to the government.

"We like the stock, as it should benefit from higher Vitamin C consumption, a stable 3-year forward earnings CAGR of 6.7%, decent dividend yield of 4%, and its strong management team,” Lim added.

Meanwhile, while there was stronger demand for consumer healthcare products, CGS-CIMB Research noted that the movement control order had negatively impacted demand for drugs in hospitals. This is a result of lower patient volume, it said, as the majority of patients have deferred obtaining non-essential/emergency treatment, particularly in private healthcare facilities.

It is now expecting the group to record sequentially weaker results ahead, on the back of slower drug demand and higher raw material costs. CGS-CIMB has downgraded Duopharma to “hold” with an unchanged target price of RM1.70.

“We expect DBB’s margins to be negatively affected in the short term by higher raw material costs. This is given: 1) the recent weakening of ringgit vs. US$ (YTD: -4.2%), as 50% of its raw material purchases are in US$; 2) higher logistics costs, and 3) supply disruption in key supplying countries (China and India) due to Covid-19.

"In our view, DDB will face difficulty in raising its products’ selling prices, particularly for government orders (49% of FY19 revenue), as selling prices are typically locked in for 1-2 years,” CGS-CIMB analyst Walter Aw wrote in a note.