Mega Lifesciences PCL: Myanmar business still a challenge
- 3Q24 results missed our expectations by 14% due to higher-than-expected forex loss
- Net profit came in at THB383mn, down 28% y/y due to FX loss of THB601mn
- Outlook remains challenging, especially in Myanmar
- Maintain HOLD with THB40 TP, based on DCF
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Adjusted net profit grew 3.5% y/y to THB544mn in 3Q24. Adjusting for the new losses from new businesses, net foreign exchange gain (loss), and normalising tax expense, adjusted net profit came in at THB544mn in 3Q24, up 3.5% y/y. Adjusted net profit for 9M24 was THB1.59bn, down 6.5% y/y.
Revenue grew 5.2% y/y to THB4bn, boosted by Mega We Care. Revenue from the branded business (Mega We Care) rose 6.6% y/y to THB2bn, driven by pharmaceutical and OTC businesses, which continued to see healthy growth. In terms of geographical breakdown, Southeast Asia contributed 78% of total branded product revenue (62% came from Indochina), while 11% came from Africa, and 11% from others.
Revenue from the distribution business inched up 2.2% y/y to THB1.9bn. After adjusting for the dual currency rate effect in Myanmar, revenue from the distribution business plunged by 20.5% y/y. This was mainly due to the decline in consumer business in Myanmar.
Blended gross margin widened y/y and q/q to 53.4%. Gross margin from the branded business expanded further to 67.7% in 3Q24 from 65.3% in 3Q23. Gross margin from the distribution business bounced back to 53.4%, due to dual currency effect in Myanmar. After adjusting for the dual currency effect, adjusted gross margin from the distribution business narrowed to 20.5% in 3Q24, vs. 24.0% in 3Q23, due to the weak distribution business in Myanmar and changing product mix.
OUTLOOK
Myanmar’s military junta has introduced new restrictions on pharmaceutical imports to help stabilise the country’s rapidly depleting foreign currency reserves. These reserves have been severely strained by the ongoing domestic instability and international sanctions since the 2021 coup. The new regulations, which came into effect on 1 September 2024, require pharmaceutical importers to repatriate export earnings before they can receive an import license. This means that importers must demonstrate they have earned export income since 1 September 2024, and that their previous pharmaceutical import permits have been cancelled by the junta's Foreign Exchange Supervisory Committee (FESC).
Myanmar is one of MEGA’s big markets, accounting for 42.1% of MEGA’s consolidated revenue in 2023. The majority (35%) came from its Maxxcare distribution business, which carries a lower gross margin of 20%-25% vs. the branded business’s gross margin of 65%-67%, and about 7% from the branded business. Note that Myanmar contributed 74% of MEGA’s overall Maxxcare revenue in 2023, while Maxxcare made up 47% of total revenue.
The branded business should continue to do well. MEGA has a healthy product pipeline of over 170 products to be launched during the next few years, which should help contribute towards future sales. So far, the existing 40 products in Mega We Care contribute over 75% of the company’s revenue. Key products include Gogaz, Gofen, Cal D Chewz, Maxcal, Calcivita, Nat C, Nat B, Nat D, etc.
2025F net profit to double compared to 2019. From the following chart, we see that MEGA has doubled its adjusted net profit – from THB548mn in 2014 to THB1.2bn in 2019. Management has targeted to double 2019's net profit of THB1.2bn to THB2.4bn by 2025. Growth should be supported by continued growth in the branded business.
Indonesia and Vietnam to be key growth drivers in the medium to long term. In the medium term, Indonesia is set to be another key growth driver. MEGA has acquired a 100% stake in PT Futamed Pharmaceuticals, a company incorporated in Indonesia which manufactures and markets pharmaceutical and nutraceutical products. This gives the company access to the Indonesian market, the largest pharmaceutical market in Southeast Asia with a market size of over USD10bn and a total population of over 275mn people.
MEGA plans to spend THB420mn in capex during 2024-25. Of the total, THB400mn will be used to upgrade the Indonesian manufacturing plant, and THB20mn towards ESG for manufacturing operations in Thailand.
In addition, MEGA is still looking opportunities to expand into Vietnam via either the acquisition of majority stakes in a current manufacturer or by acquiring a greenfield project. MEGA maintains a positive outlook for Vietnam’s pharmaceutical market, given its large population of almost 100mn people.
RECOMMENDATION
Maintain HOLD with a DCF-based TP of THB40. We like MEGA for its strong established pharmaceutical brands and leading position in fast-growing developing markets, solid management team, and strong balance sheet with a net cash position. Our key concern, however, is the rising political risk in Myanmar, which is one of the key markets for MEGA. The stock is now offering a limited upside to our DCF-based TP of THB40 (WACC of 9.4%, terminal growth of 1%) plus a moderate 2024F dividend yield of 3%-4%. We therefore maintain HOLD.
| FY Dec | 3Q2023 | 2Q2024 | 3Q2024 | % chg yoy | % chg qoq |
|---|---|---|---|---|---|
| Revenue | 3,803 | 3,954 | 4,001 | 5.2 | 1.2 |
| Cost of Goods Sold | (2,064) | (2,038) | (1,866) | (9.6) | (8.4) |
| Gross Profit | 1,739 | 1,916 | 2,135 | 22.8 | 11.4 |
| Other Oper. (Exp)/Inc | (1,021) | (1,140) | (1,099) | 7.7 | (3.5) |
| Operating Profit | 718 | 776 | 1,035 | 44.1 | 33.4 |
| Other Non Opg (Exp)/Inc | 18.5 | 13.2 | 23.9 | 29.2 | 81.4 |
| Associates & JV Inc | (0.06) | 0.20 | 0.20 | nm | 0.0 |
| Net Interest (Exp)/Inc | (8.40) | (9.32) | (10.4) | (23.8) | (11.6) |
| Exceptional Gain/(Loss) | (104) | (187) | (601) | (480.1) | 221.2 |
| Pre-tax Profit | 633 | 606 | 456 | (28.0) | (24.8) |
| Tax | (97.6) | (93.2) | (72.8) | (25.5) | (21.9) |
| Minority Interest | 0.12 | (0.04) | (0.04) | nm | 0.0 |
| Net Profit | 536 | 513 | 383 | (28.5) | (25.3) |
| Net profit bef Except. | 639 | 700 | 984 | 54.0 | 40.5 |
| EBITDA | 0.00 | 0.00 | 0.00 | nm | nm |
| Margins | |||||
| Gross Margins (%) | 45.7 | 48.5 | 53.4 | ||
| Opg Profit Margins (%) | 18.9 | 19.6 | 25.9 | ||
| Net Profit Margins (%) | 14.1 | 13.0 | 9.6 |
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