Pharmaniaga is an under-researched gem

By Star Online: Business / HDBSVR
10 October 2012

PHARMANIAGA BHD

Target price: RM10.35

PHARMANIAGA Bhd's main business is the distribution of pharmaceutical products. In the first quarter ended March 31, 60% of the group's revenue was derived from its concession agreement with the Ministry of Health, which expires in 2019.

It is a stronger entity now since the entry of new shareholder, Boustead Holdings Bhd which took it over from UEM Group Bhd. The operations has been integrated with Idaman Pharma, overall supply chain is sharpened and it is now 100% compliant with the concession.

The group also distributes pharmaceutical products in Indonesia and manufactures about 500 products at its five plants located on four sites in Malaysia.

Pharmaniaga is an under-researched gem, which is a strong proxy to Malaysia's growing healthcare industry. It is expected to ride on the projected 9.5% compounded annual growth rate of the pharmaceutical products market from 2009 to 2014.

We understand the group is in the final stages for the acquisition of a brown field manufacturing facility in Indonesia. This would allow it to manufacture pharmaceutical products there and also import its Malaysian-made products to be sold there.

This acquisition, if it materialises could be a major catalyst for the stock given the sheer size of the Indonesian population (237 million versus 28 million in Malaysia) and its already established distribution network there. Another key catalyst would be the EU GMP certification, which is expected in the first quarter of next year. That will pave the way for entry into new markets.

The stock is currently trading at 10.8 times the financial year ending Dec 31, 2013 forecast (FY13F) earnings per share (EPS), which is at a staggering 55% discount to KPJ Healthcare Bhd's 24.4 times.

The stock deserves a higher valuation because of rising investor appetite towards the booming healthcare industry, and Pharmaniaga is a strong proxy. We peg the stock to 15 times FY13F EPS to derive a fair value of RM10.35, implying a 40% upside from current levels.

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