Apex Healthcare Bhd
(Feb 20, RM2.38)
Maintain buy with a higher target price (TP) of RM2.82: Apex Healthcare Bhd’s financial year 2019 (FY19) core net profit came in within expectations. Its fourth quarter of FY19 (4QFY19) revenue grew 5% year-on-year (y-o-y), but core net profit declined 17% y-o-y mainly due to the absence of reinvestment allowance. Sequentially, revenue and earnings were softer due to the high base in 3QFY19 on the back of higher masks sales, seasonality factor and a higher effective tax rate. We reduce our earnings forecast by 5% to factor in a more cautious macro environment but maintain our “buy” rating on Apex with a higher TP of RM2.82 as we roll forward our valuation base to FY21 estimate (FY21E). We expect 2020 to be a recovery year for Apex as it continues to ramp up the production of SPP NOVO. Apex declared a final dividend per share (DPS) of two sen, bringing its full-year DPS to 3.7 sen, or a payout of 34% (2018: payout of 27%).

Revenue for 4QFY19 grew 5% y-o-y to RM171 million, mainly driven by stronger contribution from contract manufacturing and pharmaceutical sales to both private and public sectors. Notably, its manufacturing segment’s revenue grew 29% y-o-y to RM18 million and achieved its best-ever quarter on the back of the ramp-up of production of SPP NOVO. The group’s 4QFY19 core net profit however declined 17% y-o-y mainly due to the absence of reinvestment allowance which previously had lifted its earnings in 4QFY18.

Revenue and earnings were softer quarter-on-quarter (q-o-q) for 4QFY19 due to a combination of a high base in 3QFY19 on the back of stronger demand for face masks as a results of haze during the quarter, seasonality factor and a higher effective tax rate. On a positive note, 4QFY19 earnings before interest, tax, depreciation and amortisation (Ebitda) margin has improved 1.3 percentage points q-o-q to 12.8%. We believe that the commercial production of SPP NOVO helped to partially offset the fixed costs of SPP NOVO and lower associate contribution. The lower associate contribution was attributed to the postponement of fulfilment dates for a portion of secured orders to 2020 by customers and higher operating costs due to the commencement of the associate’s third new manufacturing facility.

We trim our FY20-21E earnings by 5% to factor in weaker demand due to negative impact from Covid-19. We continue to like Apex for its solid growth prospects led by its strong execution, stable earnings and added growth from the turnaround of SPP NOVO. Downside risks are higher-than-expected start-up costs and product recall risk. — Affin Hwang Capital, Feb 20