Pharmaniaga’s shares recover 7.52%, reverse losses

The stock plunges 17% or 42 sen across 2 trading days from Oct 30 to Nov 1, after the govt said it won’t extend Pharmaniaga’s concession

By MARK RAO / HUSSEIN SHAHARUDDIN

PHARMANIAGA Bhd’s shares recovered 7.52% after its drug concession for the Health Ministry was granted a 25-month interim, but industry and earnings uncertainties continue to cloud the company’s outlook.

The stock plunged 16.8% or 42 sen across two trading days from Oct 30 to Nov 1, after the government said it won’t extend Pharmaniaga’s concession to distribute drugs and medical supplies to the Health Ministry.

This effectively erased RM109.72 million from the group’s market capitalisation, as the concession — set to expire at the end of this month — contributes to approximately half its turnover.

Pharmaniaga was the sole drug and medical supplies distributor to the Health Ministry since 1994, purchasing, storing, supplying and distributing at least 700 pharmaceutical products for the public healthcare sector.

The government has now agreed to a 25-month interim period for the group’s drug procurement concession, effective up to Dec 31, 2021, Health Minister Datuk Seri Dr Dzulkefly Ahmad was reported as saying.

As part of opening up the medical supplies logistics and distribution to an open tender system, the government will also award Pharmaniaga a five-year contract for the logistics and distribution of medicines due to its capabilities and performance.

Shares in the company shot up 7.52% yesterday to close at RM2.43, extending gains this month to 16.8% to recover RM91.43 million in market capitalisation.

However, Kenanga Investment Bank Bhd reiterated its ‘Underperform’ outlook for Pharmaniaga as the 25-month interim, while a positive surprise, will only provide a temporary reprieve.

“Due to the fluidity of the news and this latest development, we upgrade our estimated financial year ending Dec 31, 2020 (FY20), net profit by 40%, taking into account a 20% increase in revenue,” it wrote in a report yesterday.

“However, our target price (TP) is raised marginally from RM1.60 to RM1.85 based on a lowered nine times FY20 estimated earnings per share (from 11.5 times previously).”

This is at a minus two standard deviation below its five-year historical forward mean due to the company’s cloudy earnings visibility beyond FY21.

The recent government award for the logistics and distributions of medicines also represents a “razor-thin” margin on profit before tax for the company.

Hong Leong Investment Bank Bhd (HLIB) said the 25-month interim granted to Pharmaniaga was unsurprising. It maintained its ‘Hold’ call on the company with a TP of RM2.14.

“With the 25-month extension, we stressed that earnings visibility remains intact for FY19 to FY21 as Pharmaniaga will be operating under the same current terms,” it wrote in a note yesterday.

Pharmaniaga remains in pole position to competitively bid in the open tender for the concession as it is backed by a 25-year track record and existing systems and infrastructure, HLIB added.

Thin margins from the concession business are also understood to be not attractive enough to attract newcomers to the sector.

In a statement last month, Pharmaniaga said it’s optimistic of its capabilities to continue serving the government despite its concession coming to an end. Analyst surveyed by Bloomberg have a consensus one-year TP of RM2.29 on the stock — 5.8% lower than its last closing price, after having reduced the TP by 17% in the past three months.