Apex Healthcare Bhd
(Aug 22, RM2)
Maintain hold with an unchanged target price (TP) of RM2.11: Apex Healthcare Bhd’s revenue grew 2% year-on-year (y-o-y) to RM159 million for the second quarter ended June 30, 2019 (2QFY19), mainly driven by its manufacturing (+2% y-o-y) and distribution segments (+2% y-o-y). Its core net profit, however, fell 6% y-o-y to RM13 million for 2QFY19, mainly due to higher operating and finance expenses arising from the Oral Solid Dosage manufacturing facility (SPP Novo) start-up.

The results came in within expectations with the six months ended June 30, 2019 core net profit accounting for 47% of street and 48% of our full-year estimates.

The weaker performance was partly offset by stronger contributions from the group’s 40%-owned associate, Straits Apex Sdn Bhd, up 121% y-o-y to RM3.3 million on improved sales. The associate company has secured new customers as a result of the US-China trade spat as most of its customers are US multinational corporations.

To recap, Apex Healthcare had received regulatory approval to start commercial production on May 16, 2019 and is currently transferring high-volume oral solid dosage products from its existing plant to SPP Novo, with a target to transfer 30 products. While we are positive about the progress, we expect a gestation period for the new plant of at least one to two years, adversely impacting its earnings for the near term.

All in, we maintained our earnings forecasts and “hold” call on Apex Healthcare with an adjusted TP of RM2.11 from RM8.42, after adjusting for the three-for-one bonus issue, based on an unchanged earnings for 2020 target price-earnings ratio of 17 times. An upside risk is lower-than-expected start-up expenses for SPP Novo. The downside risks are higher-than-expected start-up expenses, the implementation of drug price control and a product recall risk. — Affin Hwang Capital, Aug 22