PhillipCapital analyst Tay Wee Kuang has maintained his “accumulate” call on Hyphens Pharma with a reduced target price of 36.5 cents from 49.5 cents previously.
The pharmaceutical distributor, on Nov 11, posted profit after tax (PAT) of $0.8 million (down 53.0% y-o-y) for the 3QFY2020 and $5.1 million (up 5.4% y-o-y) for the 9MFY2020 ended Sept 30.
Hyphens’ 9MFY2020 earnings came 17% below Tay’s estimates due to other losses arising from inventory obsolescence.
Excess inventory of $0.6 million was marked down as a result from Covid-19 disruptions.
This included a net realisable value write-down of $80,000 under cost of sales for personal protective equipment that was marked down due to high supply and an influx of supply in the market.
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Covid-19 test kits that were obtained due to high demand from widespread testing in Singapore had to be written off after the Singapore government centralised its supply of test kits. Hyphens says it is exploring options to re-sell the kits to other markets. However, about $0.3 million in value was written off with $0.2 million remaining on the books. The remaining amount may be written off if no buyers are found.
Another $0.1 million worth of flu vaccines had to be written off due to the lack of demand following travel restrictions, while $0.2 million was written down for an assortment of products due to lockdowns in different markets, which affected demand.
About $217,000 in foreign exchange (FX) losses were also recognised due to the weakness of the SGD against the USD and Euro, as well as the depreciation of the rupiah and peso.
On the upside, Hyphens saw its proprietary-brand revenue grow 23% y-o-y as it continues to move its sales online.
Revenue was down 2% q-o-q due to the previous quarter’s recognition of $1 million of exceptional corporate sales of Ocean Health supplements.
On a like-for-like basis, revenue would have been up 26% q-o-q.
See: PhillipCapital cuts Hyphens Pharma's TP on 9M earnings falling below estimates
As the company continues to expand its proprietary-brand business with the distribution of Ocean Health in Sri Lanka and another for Ceradan in China, Tay says he expects the company to continue investing in this business on account of better margins.
He adds that he expects Hyphens’ inventories, receivables and payables to normalise in FY2022 after the company’s reorganisation of its operations.
To this end, Tay has cut his estimates for Hyphens’ earnings in FY2020 and FY2021 by 20% to “reflect a total write-off of COVID-19 test kits in the fourth quarter and a pushout in recovery to FY2022”.
“We have also reduced margin expectations from their high base in FY19 and incorporated higher expenses from possible reinvestments in its own-brand business,” he adds.
As at 1.05pm, shares in Hyphens Pharma are trading 1 cent lower or 2.8% down at 34.5 cents.