Pharmaniaga 6 Month MOH Extension Within Expectation

The Ministry of Health has given a 6-month interim extension to PHARMA’s medical supply concession, pending the finalisation of a new concession agreement, according to Kenanga Investment, this is in-line with its expectation and maintains forecasts with a target price of RM0.51.

During this period, the medicine supplier is required to implement the Pharmacy Information System (“PhIS”) and Clinic Pharmacy System maintenance, license renewal, change request and system implementation at the new facilities based on existing operating cost rates.

The research house is positive about this latest development, however, is mindful that the government will likely want to see better value-for-money and hence Pharmaniaga will have to offer new rates that are more competitive.

On a brighter note, sources say that the cost of key input, i.e. active pharmaceuticals ingredients (APIs) that sky-rocketed during the early part of 2022 is now moderating. Researcher ChemAnalyst, for instance, estimated that the global API prices declined by >2.5% in Nov 2022 and may experience further decline in December 2022 due to sluggish market demand. Typically, APIs account for about 30% of PHARMA’s total cost.

Kenanga still likes the stock for its strong earnings visibility backed by its long-term medical supply concession with MoH, from which cash flow anchors a dividend yield of 4%. However, its appeal as a growth stock has diminished with limited demand for its Covid-19 vaccine as most parts of the world are exiting the other end of the pandemic.

The TP of RM0.51 is based on 11x FY23F EPS, at a 25% discount to peers’ average due to its smaller market capitalisation. There is no adjustment to TP based on ESG given a 3-star rating as appraised by us. Reiterate MARKET PERFORM.

Key risks to call are non-renewal of concessions with the government, unsold Covid-19 inventory, and increased competition from both local and overseas players

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