By Xavier Kong
Bank-backed research house CIMB IB downgraded Pharmaniaga Bhd to a “reduce” recommendation, due to the pharmaceuticals player having a valuation which is rich in comparison to its regional peers, as well as the potential for earnings disappointments and cuts in dividends.
“Pharmaniaga’s share price has risen 60% in the year to date and 21% in the past one month despite the absence of any apparent re-rating catalyst. Its current valuation, in our opinion, allows very limited room for earnings disappointment,” noted CIMB IB.
However, the research house maintained their target price of RM6.20 and earnings forecasts for Pharmaniaga.
It was noted that Pharmaniaga’s share price had hit an all-time high of RM7.47 at the end of the trading day on April 30, and CIMB IB stated that this leaves very little leeway for the group in the event of earnings disappointment.
One potential issue is that the group’s amortisation charges in the next few years could drag its earnings lower.
CIMB IB pointed out that Pharmaniaga needed to spend an undisclosed amount for the pharmacy information system, and the uncertainties regarding how high the costs will ultimately be, as well as how soon the costs will be paid, increase the risk of higher-than-expected amortisation charges.
“Other local drug makers, such as Hovid and CCM Duopharma, have either expanded or are in the midst of expanding their manufacturing capacity. All of them intend to participate more aggressively in tender offers to fill up their idle capacity.
“This will affect Pharmaniaga as the government is the biggest buyer of drugs through tender offers and the biggest taker of Pharmaniaga’s in-house products. Tougher competition will put pressure on the company’s profit margin and manufacturing revenue growth,” noted CIMB IB.
Lower earnings from tougher competition would also result in lower dividends, with dividends also affected due to the impact from spending on the pharmacy information system on the group’s free cash flow.
At 4pm, Pharmaniaga’s shares were last traded at RM7, down 20 sen.
You must be logged in to post a comment.