Kotra Industries Bhd could expect lower earnings on lower local revenue growth with local over-the-counter (OTC) supplement sales falling back to pre-Covid-19 levels, according to Kenanga Research.
Kenanga cut its core net profit forecasts for Kotra Industries by 15.7% in FY6/24F and 19.2% in FY6/25F. We estimate supplements sales edging up 1% in FY24F and growing a further 3% in FY25F and 5% in FY26F.
“We expect core profit to fall 12% in FY24F before rising 2% in FY25F and 10% in FY26F. We expect local pharmaceutical product revenue
to rise 3% per annum in FY24F to FY26F, on the back of rising private healthcare expenditure with compound annual growth rate (CAGR) in 2016 to 2019,” it said in its Company Note today (Jan 24).
On the export side, CGS-CIMB said the Kotra’s management said it intends to focus on its existing export markets, particularly Indonesia, Myanmar, Vietnam, Cambodia and Africa.
“We think that its manufacturing capacity allows Kotra to participate in overseas tender bids to supply pharmaceutical products to the public sector, which could result in export revenue rising 6% to 8% in FY24F to FY26F,” it said.
Kotra’s ROEs have been steadily climbing since the 2011 completion of its new Kotra Pharma Technology Centre plant, which has a sizeable manufacturing capacity.
The research house Kotra long-term return on equity (ROE) to stabilise at 18% in FY26F following a boost from Covid-19 in FY23F at 24%.
“This is supported by increased economies of scale as Kotra has committed to capex spending of up to RM160 million since FY23 for the construction of a new automatic warehousing facility, and the set-up of three new manufacturing lines.
“Kotra expects the new warehouse to be completed by end-2024F to replace its current warehouse, which has reached more than 90% of its capacity since its establishment in 1997. Kotra had previously paused dividends to fund capex and pay off debt,” it said.
CGS-CIMB said given its strong net cash position and strong free cash flow (FCF) generation of between RM22 million and RM69 million for FY24F to 26F.
“We believe that Kotra should be able to sustain a 50% dividend payout ratio between FY24F and FY26F,” it said.
The research house reiterated its HOLD call, with a lower GGM-based target price (TP) of RM5.19 due to earnings revisions and a switch in our valuation method from P/E to GGM.
“While the share price has declined 30% since the start of 2023, Kotra still trades at 12.9x FY24F P/E, which is 0.8 s.d. above its mean since CY16, earnings turned positive since CY16, with valuations supported by yields of 3.9 to 4.3%, backed by strong net cash balance sheet of RM89 million at end-FY23.
The upside risks of its call is higher demand for pharmaceutical products and increase in Covid-19 infections while the downside risks are higher input costs and higher advertising spend.
