PETALING JAYA: The 10-year extension for the provision of medicines and medical supplies to the government will provide Pharmaniaga Bhd with earnings clarity over the longer term.

       Additionally, this presents a secure business for the company as analysts noted that the thin margins, coupled with the substantial upfront capital expenditure required to set up the infrastructure for distribution would deter other new entrants from participating in the concession business.

       This creates a natural barrier of entry, according to Hong Leong Investment Bank Research (HLIB).

       Pharmaniaga received a conditional letter for the continuation of medicines and medical supplies to the Health Ministry (MoH) facilities for a period of 10 years last week.

       The extension would only commence after both parties have ironed out the terms for the new concession agreement and the details are likely be finalised in the first half of this year.

       The research house did not expect significant changes to be made to the terms of the agreement.

       This comes as no surprise given Pharmaniaga’s track record as a concessionaire company as well as having the logistics and information technology infrastructure in place to manage the concession business, according to the research house.

       Pharmaniaga’s concession business is not one that enjoys lucrative margins as the concession business’ profit before tax margins typically range between 1% and 4% in the recent three years.

       However, it is the continued earnings visibility over the next decade which is a positive development for the company, according to the research house.

       HLIB maintained its earnings forecast for Pharmaniaga and retained its “buy’’ call on the counter with an unchanged target price of RM1.04 a share.

       Pharmaniaga was first awarded the concession in 1994 by MoH to purchase, store, supply and distribute at least 700 pharmaceutical products.

       Its vendor list grew over the years and it has more than 90 under the MoH’s approved product purchase list, supplying drugs and medical devices to a number of hospitals and clinics across the country. It manufactures and provides vaccines against the Covid-19 pandemic to some parties.

       In November 2019, MoH had extended its services for medicines and medical supplies to MoH facilities from Dec 1, 2019 to end- December 2021.

       As the contract expired at the end of 2021, MoH had extended it for another year from Jan 1, 2022, so that there are no disruptions in supplies while it negotiates the new 10 year contract.

       However, for the provision of logistics and distribution services to the MoH, the extension was for a five-year period until the end of 2024.