Kenanga Research remained cautious for Pharmaniaga Bhd outlook despite the group being given a 7-year extension for medical supply concession from Health Ministry.
“We remain cautious due to the negative shareholders’ equity of RM264 million as at 30 Sep 2023 impeding its ability to give out dividends,” it said in its Company Update today (Jan 5).
The research house maintains its UNDERPERFORM call, its earnings forecasts and TP of 0.31 based on 10x FY24F EPS, at a 35% discount to the average of its peers due to its PN17 status.
“There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us,” it said.
Kenanga said it has expected for the concession to be extended, and as stipulated in the CA, Pharmaniaga is required to undertake the
procurement, storage, supply and delivery of medical products.
“(It also has to) implement the Pharmacy Information System (PhIS) and Clinic Pharmacy System (CPS) maintenance, licence renewal, change request and system implementation at the new facilities based on existing operating cost rates,” it said.
The Health Ministry and Pharmaniaga Logistics Sdn Bhd (PLSB) have entered into a concession agreement (CA), which will allow the latter to undertake the procurement, storage, supply and delivery of medical products to offices and facilities within Malaysia operated and controlled by the ministry.
The CA will take effect retrospectively from July 1, 2023 for a period of seven years until June 30, 2030 subject to an earlier termination.
It said that additionally, Pharmaniaga is required to build 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.
This is to meet the requirement in relation to the government concession to provide timely delivery of drugs and non-drugs products
to government facilities throughout the country, it added.
The research house said it is positive on this latest development, which is in line with our expectation and the concession is now formally signed and extended.
There were scant details of the CA. However, we are mindful that the government seeking better value-for-money contracts and Pharmaniaga might have to offer new rates that are more competitive that we have reflected in our forecasts,” it said.
Additionally, Kenanga projects pedestrian earnings growth in FY24 at level similar to pre-Covid, averaging between RM40 million and RM60 million driven by regular order for medical supplies from the concession.
“Pharma guided for no further provisions going forward. It has managed to sell some vaccines while still keeping some unsold ones (which have been fully provided for),” it added.
In 3QFY23, Pharmaniaga has dipped into the red, registering a loss of RM49 million due to the write-offs for slow-moving expiring inventories.
The risks to Kenanga’s call include the 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.
