Kotra net profit to ease in first quarter

Despite drop-off, fundamentals ‘still strong’

“We think 1Q23 ethical sales, which make up 40% to 50% of local revenue, would rise year-on-year and quarter-on-quarter on continued inventory restocking activities at clinics, hospitals and pharmacies.” CGS-CIMB Research

PETALING JAYA: With pharmaceutical firm Kotra Industries Bhd due to release its first quarter results for the financial year 2023 (1Q23) ended Sept 30, research house CGSCIMB Research projects its net profit for the period to slide by 4% to 18% year-on-year (y-o-y) and in the range of Rm12mil to Rm14mil.

In a pre-emptive research note, CGS-CIMB Research said the projected drop in net profit for Kotra would be due to a normalisation of the sales mix (a higher proportion of lower margin products) and higher costs, driven mainly by advertising expenses and higher prices of active pharmaceutical ingredients (APIS).

The research house added that the turnover for the pharma company would remain strong for the quarter under review, supported by over-the-counter sales of highly demanded immunity-boosting supplements, such as vitamin C and multivitamins, as well as paracetamol.

“We think 1Q23 ethical sales, which make up 40% to 50% of local revenue, would rise y-o-y and quarter-on-quarter (q-o-q) on continued inventory restocking activities at clinics, hospitals and pharmacies.

“For exports, we estimate revenue, consisting of around 27% of total sales, would pick up q-o-q, owing to the delay of some deliveries from 4Q22 (ending June 30, 2022) to 1Q23 and easing logistical issues as well as freight rates,” CGS-CIMB Research said.

The research house added that the stronger US dollar against the ringgit over the quarter would not have significantly affected Kotra, as the company purchases most of its APIS in ringgit from local traders.

Acknowledging that Kotra’s financial performance has been in line with its forecast for the company’s financial year ending June 30, 2023, as well as being on par with Bloomberg’s consensus, CGS-CIMB Research said that it likes Kotra for its industry-leading return on equity, strong brand recognition, net cash position and prudent management.

Research analyst Sherman Lam said the factors have been factored into the current share price, which has seen a 25% increase since early September.

“Thus, we are downgrading the stock to a ‘hold’ call, though the share price may be supported by decently forecast FY23 and FY25 yields of 3.5% to 4.1% per annum,” CGS-CIMB Research said, renewing its target price for Kotra at RM5.12 a share.

CGS-CIMB Research pointed out that the outlook for Kotra would hinge on demand for over-the-counter and ethical products, the duration of elevated API prices, and to a lesser extent, the ringgit’s standing against the US dollar.