CGS International analyst Tay Wee Kuang has lowered his target price estimate for Hyphens Pharma International 1J5 to 35 cents from 40 cents previously as he sees slower revenue momentum based on the company’s 3QFY2024 ended Sept 30 update.
Hyphens Pharma reported 3QFY2024 revenue of $43.9 million, 2.5% higher y-o-y, due to better sales, which were mainly from the company’s Singapore and Malaysia businesses. Net profit after tax, however, fell by 5.6% y-o-y to $2 million from higher distribution costs in line with improved sales and higher manpower costs as well as an increase in administrative expenses.
” Although no segmental breakdown was provided in its 3QFY2024 trading update, we believe the weaker revenue momentum in 3QFY2024 was due to slower sales in Vietnam,” says Tay in his Nov 13 report. “This is due the expansion in gross profit margins by 3.3 percentage points y-o-y and 5.1 percentage points q-o-q in 3QFY2024, as we understood from the management previously that Vietnam tends to command lower margins due to more pricing pressure in its key hospital sales channel.”
The slowing revenue momentum could suggest that the inventory replacement cycle by customers in Vietnam after the supply chain disruptions in 1HFY2023 may have eased as well, Tay adds.
During the quarter, the analyst also notes that Hyphens Pharma incurred higher operating expenses (opex), which weighed on its margins.
“According to Hyphens Pharma, 3QFY2024 opex was higher due to improved sales, while manpower costs and administrative expenses also crept up, although it did not provide the quantum of the increase,” the analyst writes.
“We believe higher manpower costs were likely due to [the] expansion of its sales force across key operating regions such as Vietnam, Singapore and Malaysia where Hyphens Pharma plans to further grow its business, according to our conversations with the management during the 1HFY2024 analyst briefing held on Aug 19,” he adds.
For the 9MFY2024, Hyphens Pharma reported a net profit of $7.5 million. While this was 32.6% higher y-o-y, the figure still stood below Tay’s expectations, at 63.4% of his FY2024 estimates from the higher opex in 3QFY2024.
As revenue growth tapers off, the analyst has lowered his earnings per share (EPS) estimates for FY2024 by 14.8%. He has also lowered his EPS estimates for FY2025 and FY2026 by 10.6% and 10.1% respectively.
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Furthermore, the analyst sees a strengthening US dollar (USD) as a “risk” for the company as its key principal products are sourced from the US and European Union (EU), while its key sales markets are Vietnam, Singapore and Malaysia.
That said, he has retained his “add” call as he sees potential for higher contributions from new products within Hyphens Pharma’s portfolio. These new products include medical aesthetics products under its subsidiary Ardence, as well as new product lines from its proprietary brands such as Ceradan and Ocean Health going forward.
With Hyphens Pharma upping its stake in Ardence to 82% from 65% after FY2024, higher contributions from the subsidiary is a re-rating catalyst, in Tay’s view. Subsequent funding rounds for Pan-Malayan, which houses its digital assets in DocMed and WellAway, is another upside.
At the same time, an unfavourable return on investment (ROI) for the company’s sales and marketing expenses which may result in subdued profitability is a downside risk. Supply chain disruptions as well as poor cost pass-through reducing Hyphens Pharma’s pricing competitiveness, is another negative for the company.
Shares in Hyphens Pharma closed flat at 28 cents on Nov 15.
