Kotra Industries Lacks Near-Term Growth Catalysts

Kotra Industries Berhad (Kotra) is seeing normalisation in over the counter (OTC) supplement and pharmaceutical product sales as Covid-19 enters the endemic stage and local ethical drug shortages seen between late-CY22 and mid-CY23 subside.

CGS International (CGS), in a company note today (June 11), said they reduced their FY24- 26F revenue estimates by 9-11%% to reflect the declining revenue trend in 9MFY24 vs. 9MFY23.

CGS has updated their forecasts for Kotra post-3QFY6/24 results, with a reduction in our FY24F/FY25F/26F core net profit estimates by 18.6%/22.4%/27.4%. CGS estimates Kotra’s revenue will decline by 5% in FY24F before rebounding by 4.3% in FY25F and resuming growth of 4.8% in FY26F.

CGS has downgraded Kotra from Hold to Reduce, with a lower TP of RM3.70 (from RM5.19), as they believe that there are no visible catalysts in the near term to lift Kotra’s earnings.

CGS also lifted Kotra’s effective tax rate to 8.5% in FY24F, and to 15.0% by FY26F as they expect the tax rate to normalise as Kotra fully utilises its remaining deferred tax assets.

As such, they now expect Kotra’s core net profit to decline by 28.7% in FY24F and a further 2.5% in FY25F before rebounding by 2.6% in FY26F.

Following CGS’s reduction in core net profit estimates, they forecast Kotra’s ROEs will fall from a high of 27.8% in FY22 to 15.0% by FY26F as it normalises to sustainable levels it managed before the Covid-19-boosted 27.8% in FY22.

Despite a weaker forecasted FCF generation of RM9m-10m in FY24F-25F, as Kotra has committed to capex spending of up to RM160m, to be spent over FY24-25F, in CGS’s view.

They believe Kotra should be able to sustain a 75% dividend payout ratio during FY24F-FY26F as demonstrated by its 1H24 dividend payout of 73%. This can be achieved by tapping into its debt-free balance sheet with the option to gear up for a more optimal capital structure, CGS said.

Kotra is currently trading at 1 s.d. above its mean P/E of 11.6x since CY16 (earnings turned positive since CY16) in light of CGS’s declining earnings expectations.

In the healthcare ex-hospitals space, CGS prefers Optimax (ADD, TP: RM0.84, CP: RM0.69) for its FY23-25F net profit CAGR of 12.7%, supported by yields of 2-3%.

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