PETALING JAYA: MIDF Research has upgraded Pharmaniaga Bhd to a “buy” call from “neutral” previously, with a revised target price of RM2.45 from RM2.63 pre-viously, despite concerns over the government not renewing its concession agreement with the company.
Pharmaniaga has a 10-year concession agreement with the government which is slated to end in November 2019. The group, along with My EG Services Bhd, Padiberas Nasional Bhd and Puspakom Sdn Bhd are currently under scrutiny by the cabinet com-mittee on market monopolies.
MIDF Research said there is a fair chance that the concession business still be awarded to Pharmaniaga given its years of experience and expertise in the logistics and distribution business; the huge amount of investment to ensure efficient deliveries; and the massive savings enjoyed by the Health Ministry from Pharmaniaga’s handling capability.
“We estimate that it will take up at least four years for other competitors to reach the same capability. In addition, the group has renewed its focus on its non-concession business by streng-thening business synergies between its Indonesian sub-sidiaries to expand its presence in the Indonesian market,” it said in its report today.
MIDF Research said these factors will help support the group’s earnings going forward while the recent decline in the share price presents an oppor-tunity to accumulate the stock.
“In addition, the stock commands an attractive dividend of more than 7% in comparison with its peers. All things considered, we upgrade our call on the stock to ‘buy’,” it added.
Based on a meeting with Pharmaniaga, MIDF Research concluded that the company’s logistics and distribution of medical supplies is vital to all 148 government hospitals and 1,700 clinics nationwide.
Pharmaniaga’s concession business involves the logistics and distribution of 750 items listed under the Health Ministry’s approved product purchase list. The company is required to organise tender exercises that involve all prospective vendors but the selection of vendors is managed by the ministry.
“The company is allowed to submit its own bid to supply the products but their tender documents need to be sub-mitted two weeks in advance before the public call for tender. This ensures a level playing field to all other potential vendors. In fact, Pharmaniaga’s in-house products only accounted for about 27% of the concession business,” MIDF Research noted.
Pharmaniaga has incurred huge investments on system and process improvements over the 10-year tenure of the concession agreement, including RM300 million for the development of the Pharmacy Information System (PhIS) across the ministry’s 1,118 facilities.
In FY19, the company plans to invest some RM122 million to increase its warehouse capacity, particularly in Terengganu and Sarawak to further reduce delivery time. Its current ware-house capacity is about 430,000 sq ft nationwide.
Meanwhile, the group is also working on reducing its depend-ency on the concession business, with a mid-term target revenue contribution of 40% from the concession business and 60% from the non-con-cession business.
“Going forward, we expect the growth momentum to continue given the company’s focus on manufacturing seg-ment which commands a better margin. In fact, Pharmaniaga has allocated about RM52 million to build up its manufacturing capabilities,” said MIDF Research.
The research house, however, revised Pharmaniaga’s earnings forecasts downwards for FY19F and FY20F by RM5.9 million and RM5.8 million respectively, based on higher finance costs to fund the planned capital expenditure and higher effective tax rate of 30%.
