Key takeaways from meeting cum plant visit
? We recently hosted a meeting cum site visit to PHRM’s OSD plant in Bangi.
? We see decent FY23-24F earnings growth, aided by its ample excess capacity and CHC expansion, but are wary about a potential margin squeeze.
? More stringent requirements under its new government CA should not be a cause for concern, in our view. Reiterate Add, with a lower TP of RM0.73.
Expecting better economies of scale from excess capacity
We recently hosted a meeting cum site visit to Pharmaniaga’s (PHRM) manufacturing plant for oral solid dosages (OSD) in Bangi, Selangor. We gathered that the facility is operating at a decent utilisation of c.65% (close to 70%, a level it deems optimal), though the blended utilisation for its other plants is lower at c.50% due to stiff competition in the generics market. We believe the ample excess production capacity at PHRM’s existing plants will allow it to ramp up output in the next 3-5 years (in light of rising pharmaceutical demand and new product launches) with little to no incremental capex, thus potentially leading to better economies of scale and margins. Meanwhile, it conservatively targets annual local revenue contribution of RM100m/RM80m from halal vaccine/insulin manufacturing (to commence in FY24-25), with further upside potential from export sales.
New products & A&P initiatives to drive robust CHC revenue growth
PHRM hopes to double/triple consumer healthcare (CHC) revenue between FY21 and FY23/24, albeit from a low base (<1% of total revenue), as new product launches (e.g. effervescent, knee/joint pain management) supported by advertising & promotion (A&P) more than offset a normalisation in Vitamin C demand (boosted by Covid-19). It is also exploring possible acquisitions of brands with established product ranges and customer base to expedite its CHC expansion; it has not factored this into its revenue target.
More stringent concession standards not a cause for concern
The performance standards of PHRM’s new 10-year logistics & distribution (L&D) government concession agreement (CA; to be inked by year-end) will include a more stringent maximum delivery timeframe of 5 working days for medicines (current: 7 days), with monetary penalties imposed for non-compliance. Nonetheless, PHRM does not foresee any major challenges complying with the new requirements as it currently delivers within 4 days on average. While it will set up 3 new warehouses in Malaysia over FY23-26, it expects the impact of the incremental capex (total: RM120m) to be offset by better L&D operational efficiencies. The rise in API cost and weaker RM/US$ has had minimal impact on margins thus far, though it flagged that input costs could rise (thus squeezing margins) if the situation is prolonged (i.e. over the next 3 months or longer).
Reiterate Add with a lower TP of RM0.73 (15x CY23F P/E)
We cut FY22-24F core EPS by 6.0-7.5% to factor in lower EBITDA margin (potential input cost pressures, higher mix of lower-margin CHC sales) and higher FY23-24F capex (for new warehouses). Thus, our TP falls to RM0.73, still based on 15x CY23F P/E (0.5 s.d. above 5-year mean, on account of potential biopharma contribution).