RHB Research is upbeat on the prospects of Duopharma Biotech Berhad and has initiated coverage of the company with a buy call at RM1.58 and target price of RM1.88 and expects a three-year earnings compound annual growth rate (CAGR) of 15%.
In its report entitled “Catch me while you can”, the research house noted that this is due to higher demand for pharmaceutical products – in line with rising health awareness, better efficiency from its new, highly active pharmaceutical ingredients (HAPI) plant from the first quarter of 2020 (1Q20), and improved export sales.
Duopharma Biotech’s cumulative nine months of the financial year 2019 (9MFY19) earnings grew 30% year-on-year (yoy) to RM43.2 mil on a 15% yoy improvement in revenue and an 18.5% higher earnings before interest, taxes, depreciation and amortisation (Ebitda) margin (9MFY18: 16.5%).
Summary of report dated 8 January 2020 as follows:
- Initiate coverage with BUY, MYR1.88 TP, 19% upside with c.3% FY20F yield. Our TP implies 20.1x FY20F P/E (+1.25SD above its 2-year average P/E). The +1.25SD premium is justified on Duopharma Biotech’s market leadership, solid earnings growth prospects and strong management. We expect a 3-year earnings CAGR of 15%, due to higher demand from pharmaceutical products – in line with rising health awareness, better efficiency from its new HAPI plant, and improved export sales.
- Largest local pharmaceutical company by market cap and volume. Its market cap of MYR1.08bn is the highest among the listed pharmaceutical companies in Malaysia. Among the top 10 pharmaceutical companies in Malaysia, it has a market share of 28%. Duopharma is a market leader for vitamin C products via the Flavettes and Champs brands. Other products distributed/manufactured are for diabetes, hepatitis C, cancer and kidney disease treatments.
- Solid earnings growth expected for FY19-21. We expect a 3-year earnings CAGR of 15%. This is due to the higher demand for pharmaceutical products in line with growing health awareness, better efficiency from its new highly active pharmaceutical ingredients (HAPI) plant from 1Q20 onwards, and improved sales from exports. 9HFY19 earnings grew 30% YoY to MYR43.2m on a 15% YoY improvement in revenue and higher 18.5% EBITDA margin (9M18 EBITDA margin: 16.5%).
- FY20F dividend to recover after a decline in FY19F. We expect a lower FY19F dividend of 3.7 sen (FY18: 5.3 sen) before recovering to 4.2 sen in FY20F. The lower dividend is due to the need to fund the construction of new plants in Klang (K3 and K5). As the expansion will boost capacity by 50% in 2021, the benefits should outweigh the short-term lower dividend impact.
- Risks: full-fledged drug price control and FX. Malaysia is planning to regulate medicine prices. However, we believe that the Government will allow certain market freedom instead of full-fledged drug price control, to ensure innovation and sustainability of the supply of quality medicines. The FX rate is also a risk as around 8% of sales are for export, while about 60% of costs are denominated in USD terms.
- Strong management team. Group Managing Director Leonard Ariff has more than 30 years of experience. He was also the president of Malaysian Organisation of Pharmaceutical Industries (MOPI) from 2009 to 2014. The company’s chairman Tan Sri Datin Paduka Siti Sa’diah Sheikh Bakir has been in the healthcare industry for more than 40 years.
A copy of the report can be found here.
Duopharma Biotech Berhad closed at RM1.61 last Friday (10 January 2020), near to its 52-week high.
Group Managing Director En. Leonard Ariff Abdul Shatar received two awards namely Malaysia Pharmaceutical Company of The Year and Malaysia Halal Pharmaceutical Company of The Year at Frost & Sullivan Asia Pacific Best Practices Awards 2019
Note: This is not a recommendation to buy or sell stocks. Please consult your financial advisor before making any investment decision.