PETALING JAYA: Duopharma Biotech Bhd
, which wrapped up financial year 2022 (FY22) on a strong note with record high revenue and net profit, expects operational costs to increase in 2023.
According to CGS-CIMB Research, Duopharma guided that it could see a potential incremental operating expenditure (opex) of RM15mil to RM18mil in FY23 due to higher electricity and staff costs.
While margin compression is likely, the research firm does not expect a dent in net margins.
It said cost pressures would be partly mitigated by the price increases for its private sector customers and the easing of raw material costs following a more favourable ringgit-US dollar exchange rate, plus decreasing freight rates.
CGS-CIMB Research said it “came away more negative” from Duopharma’s 4Q22 results briefing and has reduced the rating of the pharmaceutical group to a “hold”, from “add” previously.
“Duopharma now expects a substantial year-on-year (y-o-y) jump in FY23 opex, driven by incremental electricity costs of RM8mil to RM10mil per annum as the imbalance cost pass-through surcharge set by the government has been raised to 20 sen per kilowatt hour in the first half of 2023,” the research firm said.
Meanwhile, staff costs could potentially amount to RM7mil to RM8mil per year due to a doubling of the wage threshold for overtime payments to RM4,000 per month from January 2023 and a full-year impact of the hike in national minimum wage to RM1,500 a month.
“Thus, the potential incremental opex of RM15mil to RM18mil per annum from FY23 leads us to believe Duopharma will face a compression in FY23 to FY25 forecast core net profit margin,” said CGS-CIMB Research.
However, the research firm said downside risks remain limited given the stock’s undemanding valuations.
It noted positive revenue trends for January and February 2023 driven by improved ethical sales to the private sector, which more than offset softer consumer healthcare demand for vitamin C products, post-Covid-19.
“Positively, sales of its key analgesic product, Uphamol 650, almost doubled y-o-y in FY22; its good traction has helped to cushion the waning vitamin C demand so far,” it added. ‘
RHB Research, on the other hand, continues to be upbeat on Duopharma, noting that the group’s drug procurement remains robust, primarily driven by the private and public sectors.
The group has also made an impairment of about RM30mil for the Sinopharm vaccine in 2022 as inventory is said to expire by May.
It notes that amid softening demand from the consumer healthcare wing, Duopharma still sees growth opportunities making up the shortfall from vitamin C sales via the Iroro brand, which is a halal-certified anti-hair loss product that is set for launch via eCommerce platforms in 2023.
The K3 manufacturing plant’s completion is also set to provide potential tax savings of RM10mil by 2024, said RHB Research.
On the supply agreements between Pharmaniaga Logistics Sdn Bhd and Duopharma, the research firm said although the contract was extended until June, Duopharma expects it to be rolled over by another six months given the absence of a tender notice, which is usually done six months prior to a contract expiration.
The research firm said there are no apparent liquidity risks arising from Pharmaniaga’s classification under the financially troubled Practice Note 17 category due to a RM552mil provision for slow-moving stocks of Covid-19 vaccines.
It notes that Duopharma continues to receive payments from the former in relation to the awarded approved product purchase list contract, which contributes about 25% of Duopharma’s revenue.
Although it maintains a buy call on Duopharma, RHB has lowered the pharma company’s FY23 to FY24 forecast earnings by 13% and 15%, taking into account the softening consumer healthcare sales and escalating operating costs.
That said it expects the consumer healthcare segment to sustain its growth in 2024, underpinned by the unit’s cost-pass-through capabilities and long-term inelastic consumer demand towards supplements and healthcare products.
“We believe the group still commands a premium over its peers, given its increasing exposure to the private sector, strong presence in the local consumer healthcare market, and better-than-peers’ margins profile,” said RHB Research.
