The research house said this following a briefing by Duopharma, which confirmed it had been receiving payments from Pharmaniaga in relation to the approved product purchase list (APPL) contract.
“Pharmaniaga has given its written commitment to fulfil its financial obligation to Duopharma, which has continued to receive payments from (Pharmaniaga) in relation to the awarded APPL contract,” RHB said in a note today.
Pharmaniaga awarded the APPL contract to Duopharma in 2017 to supply pharmaceutical or non-pharmaceutical products to government hospitals and clinics. The contract contributes approximately 20% of the latter’s annual revenue.
In the beginning, the contract covered the period from Dec 1, 2017 to Nov 30, 2019, which was later extended three times to June 30, 2023.
In May 2023, Duopharma managing director Leonard Ariff Shatar stated the company is expected to secure an additional six-month contract extension, likely in late June.
According to RHB, the tendering process for the new APPL contract has started and it is expected to be completed by Q1 FY2024.
“We are positive with the development as the drug supply contract has been carried out on a rollover basis (based on 2017 terms), whereby the contract terms do not reflect the latest exchange rate,” it said.
The research house has lowered its earnings guidance for Duopharma for the financial year ending Dec 31, 2023 (FY2023) to FY2024 by 10% to 12%. This takes into account higher financing costs and depreciation charges related to the commercialisation of its new K3 plant in Selangor.
“We estimate that every 1% appreciation of the US dollar could potentially erode its earnings by 0.5%, given active pharmaceutical ingredients (denominated in US dollar) account for circa 50% of Duopharma’s total cost,” RHB said.
“With post certificate of completion of the K3 plant in Q2 2023, Duopharma expects to recognise potential tax savings of RM10 million by 2023, despite the fact that it has until 2026 to recognise it,” it added.
Despite maintaining its “buy” call, RHB trimmed its target price (TP) for the stock to RM1.38 from RM1.59 previously, to account for a 4% environmental, social, and governance (ESG) discount to its integral value.
RHB said it favours Duopharma as it is underpinned by its gradual increase in exposure to the private sector, a strong presence in the local consumer healthcare market, and better-than-peers’ margin profile.
Its net profit fell 23% to RM12.5 million in the second quarter ended June 30 (Q2 FY2024) from RM16.3 million a year before while revenue dropped 8% to RM167.6 million from RM181.7 million previously.
Duopharma’s shares ended up 1 sen or 0.88% at RM1.15, giving it a market capitalisation of RM1.11 billion.