KUALA LUMPUR (Nov 21): Hong Leong Investment Bank (HLIB) Research has maintained its "hold" call on Pharmaniaga Bhd at RM2.21 with a lower target price (TP) of RM2.08 (from RM2.14) and said its FY19-21 earnings forecast had been lowered by 42%, 35% and 29% respectively.

In a note today, HLIB said it tweaked its forecast to account for higher amortisation charges on the Pharmacy Hospital Information System (PhIS).

It said this was as while the PhIS was developed for Health Ministry (MoH) with expectation of 10 years, but with the five-year extension given by MoH, the research house shortened the amortisation schedule (from 10 years to five years) and on higher operating expenses.

It said Pharmaniaga's core profit after tax and minority interest (PATMI) for the third quarter of financial year 2019 (3QFY19) of RM12.1 million, which rose 52.5% quarter-on-quarter (q-o-q) and fell 36.4% year-on-year (y-o-y), brought core PATMI for the cumulative nine-month period of financial year 2019 (9MFY19) to RM41.2 million, down 23% y-o-y, accounting for 69% of the research house's and 72% of consensus estimates.

"The deviation was due to higher-than-expected operating expenses (+27.9% y-o-y)," it added.

HLIB said revenue improved to RM716.8 million, up 19.1% q-o-q, mainly due to higher overall demand from both the concession and non-concession business in Malaysia and Indonesia.

Furthermore, Pharmanianga's better revenue contribution, up 22% y-o-y, was principally due to stronger demand from concession and non-concession businesses.

9MFY19 revenue rose 17.7% y-o-y to RM2.1 billion on the back of stronger performances from both concession and non-concession business.

HLIB said Pharmaniaga's overall profit before tax declined by 20% y-o-y. Logistics and distribution (L&D) division generated higher revenue, up 17.9% y-o-y.

Nonetheless, this was slightly offset by higher finance costs, which rose 14% y-o-y. Manufacturing division saw a 10.7% y-o-y decline in revenue due to lower take-up by the government, further impacted by higher finance costs, which rose 9.6% y-o-y.

The research house foresees Pharmaniaga's 4QFY19 earnings to be further impacted due to the higher amortisation of PhIS.

"However, on a more positive note, the recent five-year extension by the MoH provides medium-term visibility,'' it said.

Meanwhile, it said the Indonesian division turned to losses despite a 16.4% y-o-y increase in revenue due to higher finance costs, (up 19.6% y-o-y).

"Subsequently core PATMI declined 23% to RM41.2 million, after the removal of non-recurring expenses (circa RM10 million)," it said.

The research house said there is no dividend declared (3QFY18: 5 sen per share; 9MFY18: 14 sen per share).

At 9:36am, shares of Pharmaniaga dropped 0.9% or 2 sen to RM2.19, valuing it at RM577.32 million.