Pharmaniaga Bhd is only expected to gain a pedestrian earnings growth in FY24 at level similar to pre-Covid, driven by regular orders for medical supplies from the Health Ministry concession.
Kenanga Research said Pharmaniaga is guided for no further provisions going forward.
“It still holds some unsold vaccines, which have already been fully provided for and has managed to sell some. It is building four new warehouses to meet the requirement for a government concession,” it said in its Company Update today (Dec 5).
Consequently, the research house maintains its UNDERPERFORM call, its forecasts and TP of 31 sen based on 10x FY24F EPS, at a 35% discount to the average of its peers due to its PN17 status, with no adjustment based on 3-star ESG rating.
“We remain cautious on Pharmaniaga due to the negative shareholders’ equity impeding its ability to give out dividends and the possibility of having to offer competitive rates should the government seeking better value-for-money contracts.
Kenanga came away from post-3QFY23 results briefing with the group feeling cautious.
“In 3QFY23 dipped into the red, registering a loss of RM49 million due to the write-offs for slow-moving expiring inventories namely personal protective equipment and needles (RM65m), and product development costs (RM7.6 million) due to the non-commercial viability of the products.
“Additionally, it is building four new warehouses, being part of a RM220 million capex plan to be funded with proceeds from a rights issue and a private placement of new shares to meet the requirement in relation to the government concession,” it said.
Others update is the group is establishing manufacturing facilities for vaccines and insulin to cope with the increasing needs in these therapeutic areas, on track for commercialisation for vaccines in 2025 and insulin in 2026.
The group also expects its Indonesian operation to stay profitable in 4QFY23, having already achieved a 9MFY23 PBT of RM7.2 million driven by operational efficiency gains through on-going inventory optimisation efforts and aggressive payment collection.
“Specifically, it has managed to keep tabs on fast moving SKUs and reduce slow moving stocks and lowering working capital requirements.”
Most importantly, the research house noted that Pharmaniaga is hopeful to exit PN17 status by end-CY2024.
“Earlier, it has proposed to regularise its financial situation via a proposed capital reduction and cancellation of RM180 million issued share capital, a 4-for-5 rights issue of 1.18 billion new shares with 1.18 billion free warrants, and a proposed private placement of 714 million new shares or 26.9% of the enlarged issued share capital after the proposed rights issue.
“This will raise a combined RM655 million which is earmarked for repayment of borrowings (RM264 million), working capital (RM160 million), and capex (RM220 million ).
“The RM264 million for debt repayment will marginally improve its net debt of RM1.1 billion as at 30 Sept 2023 to a net debt of RM850 million, and the enlarged number of shares will triple from 1.44b to 3.37b which will be EPS dilutive.”
The risks to Kenanga’s call include appointment of new concessionaires by the government, its PN17 regularisation plan being less dilutive to existing shareholders, and privatisation at a significant premium to the current market price.
