CGS-CIMB maintains ‘add’ on Hyphens Pharma at lowered target price

Hyphens' gross profit margin showed a 4.8% y-o-y decline to 35.4% in 3QFY2023, which it attributes to inflationary cost pressures.

CGS-CIMB Research analyst Tay Wee Kuang is keeping his “add” call on Hyphens Pharma International 1j5 at a lowered target price of 32 cents from 34 cents previously, following the company’s 3QFY2023 ended Sept 30 results.

In his Nov 27 report, Tay notes that Hyphens' revenue grew 0.1% y-o-y in the quarter, taking its 9MFY2023 revenue to $117.5 million, which was “in-line” at 74.2% of his FY2023 estimate.

The analyst adds: “Although a detailed revenue breakdown was not provided, Hyphens said sales from its specialty pharma principal segment and medical hypermart and digital segment had grown 0.6% y-o-y and 1.9% y-o-y, respectively, to offset the 4.2% decline in sales of its proprietary brands segment.”

Supply disruptions which led to an inventory stock-out in the company’s Vietnam market in 1HFY2023 had eased in 3QFY2023, and the company expects further improvements in the supply situation by end-FY2023.

“This should signal better revenue momentum, in our view, especially with new products added to its portfolio in 1HFY2023 that should see sales slowly pick up as they gain traction in the market,” writes Tay.

Meanwhile, the company’s gross profit margin showed a 4.8% y-o-y decline to 35.4% in the quarter, which Hyphens attributes to inflationary cost pressures.

On this, the analyst writes: “We think the discontinuation of Hyphens’ distributorship of Biosensors products in Vietnam, which led to a gross profit margin compression of 1.4% in 1HFY2023, had a similar impact on 3QFY2023’s gross profit margin, given that the distributorship only ceased in 4QFY2022.”

Tay also understands that the y-o-y decline in sales of Hyphens’ proprietary brands segment in 3QFY2023 likely led to a poorer sales mix, contributing to the company’s gross profit margin.

Despite easing supply constraints pointing to an improvement in revenue momentum, Tay notes that “margins could remain compressed”, as it could “take time” for Hyphens to pass on the higher costs from brand principals to hospitals with “superior bargaining power”, as well as from its proprietary brands that consist of more discretionary consumer healthcare products.

Outlook

As a result, Tay has reduced his discounted cash flow-based (DCF) target price after lowering his FY2023, FY2024 and FY2025 earnings per share (EPS) estimates by 12.9%, 5.3% and 5.1% respectively, to account for gross profit margin deterioration, even though his revenue estimates are “higher” as he expects Hyphens’ sales to benefit from the increase in products within its portfolio.

Noted re-rating catalysts by Tay include the earlier commercialisation of new products in Hyphens’ portfolio, as well as more accretive acquisitions of proprietary brands or businesses. Conversely, downside risks include slower proprietary brand sales, further margin compression and depreciation of the Vietnamese dong (VND) against the US dollar (US$) and Euro (EUR) where Hyphens’ brand principals originates.

As at 3.05 pm, shares in Hyphens Pharma International are trading at 0.5 cents lower or 1.79% down at 28 cents.

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