Duopharma poised for a re-rating

PETALING JAYA: As the Covid-19 pandemic hype diminishes, Duopharma Biotech Bhd’s strong execution and consistent earnings growth should eventually lead to a re-rating.

Duopharma is seen as a proven defensive shelter amid financial and economic uncertainties.

For this year, analysts are confident that the group will achieve satisfactory growth led by the higher budget allocated for the healthcare industry and improved contribution from the insulin contract worth Rm375mil over the next three years, which works out to about Rm80mil per year.

In addition, the group may enjoy potential tax savings of more than Rm10mil over the next few years upon the completion of the K3 plant this year, TA Research said.

Duopharma recently released its first quarter financial year 2022 (1Q22) results which was well supported by the private sector, ethical and consumer healthcare sales.

UOB Kay Hian Research said its margins held stable despite a lumpy inventory writeoff, thanks to its better product mix for the quarter. It maintains its “buy’’ call with a target price of RM1.80 a share. While sentiment over Duopharma’s vaccine beneficiary role has swung back and forth, its primary operations have chugged along quietly, the house said.

It expects Duopharma to gradually re-rate and appreciate its consistent execution once vaccine-related expectations, noise and sentiment diminishes.

The house did not make changes to its earnings forecast but cited key risks as uncertain regulatory landscape arising from the drug price control mechanism, single customer concentration (50% of Duopharma’s sales are from the government), and the strengthening of the greenback against the ringgit.

Duopharma reported net profit of Rm20.3mil for 1Q22, which was within most analysts’ expectations.

This led to CGS-CIMB Research to lift its FY22-FY24 core earnings per share (EPS) by 6%-7.3% to reflect higher manufacturing revenue (higher margin) and for housekeeping, partly offset by reduced contribution from the Sinopharm Covid-19 vaccine supply (FY22) and lower export sales.

It now believes FY22 core EPS will grow a healthy 16% (private and public sector sales growth, potential one-off tax savings once K3 plant starts operations), before easing to 4% in FY23 (mainly due to lack of tax savings), then resuming a 9% growth in FY24.

Assuming a lower payout of 30% (similar to FY21; previous forecast: 70%), the house expects FY22-FY24 dividend per share of 2.9 sen - 3.1 sen (versus 6.1 sen - 6.7 sen previously).

The house maintains its “hold’’ on the stock with a TP of RM1.60 a share. TA’S TP is at RM1.93 per share with a “buy’’ call.