Kenanga Research remains upbeat on Kotra Industries Bhd (Kotra) driven by growing domestic over-the-counter (OTC) market despite the group’s underwhelming first half of the financial year ended 31 December 2023 (1HFY24) results.
In its Results Note today (Feb 22), it said the pharmaceutical and healthcare products manufacturer’s 1HFY24 results disappointed, with net profit missed expectations at only 43% and 42% our full-year forecast and the full-year consensus estimate, respectively.
“The variance against our forecast came largely from weaker-than-expected sales, we believe, as consumers held back purchases on weak spending sentiment,” it said.
Year-on-year (YoY), its 1HFY24 revenue fell 13% as we think consumers likely held back purchases on weak spending sentiment while 1HFY24 net profit declined by 27% due to a higher effective tax rate.
A 1st interim dividend of 12.5 sen was declared which is within our expectation.
Its earnings before interest, taxes, depreciation, and amortization (Ebitda) margin fell by a steeper 25% on less-than-optimum economies of scale, both in terms of manufacturing and marketing, on reduced sales volumes.
As a result, the research house cut its FY24 to FY25F net profit forecasts by 16% and 9%, respectively, and reduced its target price (TP) by 2% to RM5.90 from RM6.03 to reflect the rolling forward of our valuation base year to FY25F from FY24F.
“The basis of our TP 15 times FY25F earnings per share (EPS), in line with its peers’ average. There is no adjustment to our TP based on environmental, social, and corporate governance (ESG) given a 3-star rating as appraised by us,” it said.
Kenanga said the reduced forecasts was derived from its lower sales volume growth assumptions of between 3% and 10% from between 4% and 11% as well as reduced our Ebitda margin assumptions to between 28 and 31% from between 31% and 33%.
However, the research house reiterated its OUTPERFORM call as it expect consumer sentiment to gradually improve during the year as and when more clarity emerges over subsidy rationalisation, especially in relation to RON95.
“Once put in place, consumers will gradually ‘come to terms’ with it and resume spending in accordance with what they can afford. A gradual pick-up in the local economy and job market in-line with the recovery in the global economy will also help.
“The expanding domestic OTC market should help Kotra as OTC products accounts for 50% of its revenue. The out-of-pocket healthcare spending in Malaysia at private pharmacies has grown at a 10-year compound annual growth rate (CAGR) of 11%,” it said.
Kenanga continues to like Kotra for the bright prospects of the OTC drug market, its integrated business model, and the superior margins of its original brand manufacturing (OBM) business model.
The key risks of its recommendation include failure in clinical trials could scupper new products break-through, its dependency on commercialisation of new products and slower-than-expected commercial operation of the new lab
