KUALA LUMPUR: An extension to Pharmaniaga Bhd 's concession agreement with the Health Ministry (MoH) would stimulate buying interest in the counter as it provides earnings visibility over the longer term, says Hong Leong Investment Bank (HLIB) Research.

       The pharmaceutical group announced in a bourse filing yesterday that its subsidiary, Pharmaniaga Logistics Sdn Bhd, had received a conditional letter for the continuation of medical supply to MoH facilities for 10 years, subject to both parties' agreement on terms and conditions.

       In a report, HLIB said it expects the parties to come to an agreement by 1H22 with no significant changes to be made over the previous arrangement.

       The research firm, which reiterated a "buy" call on Pharmaniaga, said the news did not come as a surprise given Pharmaniaga's proven track record in managing the concession business.

       The group has also established logistics and IT infrastructure over the years to handle the concession business.

       "While Pharmaniaga’s concession business is not one that enjoys lucrative margins – concession business’ PBT margins typically range between 1-4% in the recent 3 years – we are of the view that the potential 10-year extension would continue to provide earnings clarity over the longer term.

       "The thin margins, coupled with the substantial capex required upfront to set up the required infrastructures would create a natural barrier of entry, ultimately deterring other new entrants from participating in the concession business," said HLIB.

       The research firm maintained its earnings forecasts as it awaits clarity on the terms of the new agreement.

       In the meantime, it kept its target price unchanged at RM1.04, implying a price-earnings of 18.5x at plus-one standard deviation of its five-year mean on its projected FY22 earnings per share of 5.6 sen.