KUALA LUMPUR (Nov 14): CGS-CIMB Securities Sdn Bhd has raised Kotra Industries Bhd's target price to RM5.12 (from RM4.76), due to its industry-leading return on equity, strong brand recognition, net cash position, and prudent management.

The estimate was arrived at based on 13 times calendar year 2024 (CY2024) price-earnings (rolled over from CY2023, still 10% below CGS-CIMB’s five-year mean for the Malaysian pharma sector).

However, CGS-CIMB downgraded the stock from “add” to “hold”, as the research firm believes the positives have already been priced in, with the share price rising 25% since it initiated coverage on Sept 12.

“We cut our core earnings per share forecasts by 1-4% for the financial year ending June 30, 2023 (FY2023)-FY2025 due to housekeeping reasons. Thus, we downgrade our call to 'hold', though the share price may be supported by decent FY2023-25 yields of 3.5-4.1% per annum (a payout ratio of 50% versus 45% previously),” said analyst Sherman Lam Hsien Jin.

The pharmaceutical and healthcare product manufacturing company is expected to release its first-quarter (1QFY2023) results at end-November.

“We estimate its 1QFY2023 core net profit to have eased 4-18% year-on-year (y-o-y) to RM12 million-RM14 million, as mild revenue growth may be more than offset by sales mix normalisation and higher costs.

“We also see core net profit sliding 10-23% quarter-on-quarter (q-o-q), as other income and taxes may have normalised (4QFY2022 was boosted by the recognition of RM4.7m deferred tax assets). However, we expect the company's 1QFY2023 results to be broadly in line at 23-26% of our revised FY2023 forecast, and 22-25% of the Bloomberg consensus,” Lam said.

He added that the company's 1QFY2023 local revenue is expected to stay strong, rising y-o-y despite the high base in 1QFY2022, albeit tapering mildly q-o-q.

Lam said over-the-counter sales may have softened y-o-y and q-o-q, but remained supported by high demand for immunity-boosting supplements (vitamin C, multivitamins) and paracetamol, aided by the renewed Covid-19 wave in 1QFY2023.

“We think 1Q ethical sales have risen y-o-y and q-o-q, on continued inventory restocking activities at clinics, hospitals and pharmacies,” he added.

He also expects Kotra’s revenue to have picked up q-o-q, owing to the delay of some deliveries from 4QFY2022 to 1QFY2023, easing of logistical issues and freight rates, and a more beneficial US dollar-ringgit exchange rate.

“Revenue may have dipped y-o-y, as 1QFY2022 was boosted by lumpy orders,” he said.

Shares in Kotra had dipped 0.76% to RM5.20 each in early trade on Monday (Nov 14), giving the company a market capitalisation of RM769.56 million.