Hyphens Pharma International - SAC Capital 2021-03-17: Growing Regional Presence


Hyphens Pharma International - Growing Regional Presence

  • Hyphens Pharma's FY2020 revenue grew but net profit hurt by higher provisions.
  • Proprietary brands products (Ceradan, Ocean Health) were the key revenue driver.
  • E-pharmacy licence awarded for WellAway Pharmacy.
  • Marginal adjustments to our earnings estimates. Maintain BUY on Hyphens Pharma but at lower fair value.

Higher provisions dragged Hyphens Pharma's FY20 profits down

  • Hyphens Pharma International (SGX:1J5)'s FY2020 revenue increased 3.6% y-o-y, but NPAT declined 5.6% due to higher provisions and distribution costs. Topline increased by 3.6% y-o-y from S$119.4 million in FY2019 to S$123.7 million in FY2020, mainly due to higher sales from the proprietary brands segment which grew by 25.9% with a higher demand for dermatological products under the Ceradan brand and nutritional supplements under Ocean Health brand.
  • Gross profit margin for FY2020 remained relatively stable at 35.4% (FY2019: 35.7%). However, the bottomline saw a y-o-y decline due to higher allowance for inventory obsolescence and higher advertising and promotional expenses to promote products in proprietary brands and specialty pharma principals segments.
  • Hyphens Pharma’s net profit decreased by 5.6% from S$6.5 million in FY2019 to S$6.2 million in FY2020.

Other Losses

  • Hyphens Pharma’s one-off losses include a charge of S$1.6 million for the provision for inventory obsolescences. Provision was charged on
    1. specialty pharma inventory with weaker demand from the lockdown in the Philippines (S$0.2m) and overall inventory (S$0.1m);
    2. at medical hypermart for short shelf-life items such as flu vaccines (S$0.2m);
    3. write down of personal protective equipment (PPE) to net realisable value in view of higher supply in the market (S$0.6m); and
    4. COVID-19 diagnostic test kits (S$0.5m).
  • With the extension of the government’s Jobs Support Scheme (JSS) by 6 months to September 2021, Hyphens Pharma will continue to benefit from the government grants, although we expect lower grants in FY2021 compared to FY2020.
  • We expect topline to continue to increase from higher sales in the proprietary brands segment and penetration into new markets. We also expect that the advertising and promotional expenses budget to continue to rise in FY2021 as they bring their products to more markets.

E-pharmacy licence awarded for WellAway Pharmacy

  • Hyphens has been awarded an e-pharmacy licence for WellAway Pharmacy in 2020 by the Health Sciences Authority in Singapore.
  • WellAway Pharmacy is a healthcare service delivery, which delivers the medicine to patients after remote diagnosis and treatment, or telemedicine service. WellAway aims to leverage on the medical and logistical expertise of Pan-Malayan, to work closely with medical clinics in Singapore.

Increasing focus on Proprietary Brands

  • Revenue from proprietary brands segment rose 25.9% y-o-y, from S$14.5 million to S$18.2 million. This was due to higher demand for dermatological products under Ceradan brand and nutritional supplements under Ocean Health brand.
  • Hyphens Pharma is placing more focus on its proprietary brands segment, with higher R&D costs incurred, growing 110.7% y-o-y from S$0.2 million to S$0.4 million. We believe this is just the start of higher R&D investment into the segment as it shifts its focus to building core brands and increase outreach.
  • In line with this, Hyphens Pharma expanded its proprietary brands footprint overseas, namely the distribution of Ocean Health into Sri Lanka, Ceradan into Mainland China, and TDF Fairence into South Korea. This is a step forward to tap into bigger markets outside Southeast Asia. In FY2020, sales contribution from proprietary brands make up 14.7% of Hyphens Pharma's total revenue (FY2019: 12.1%).
  • Although we do not expect high increase in their sales contribution in the short term, as brand and recognition and loyalty take time to build, we believe these ventures are strategic in the long-term.
  • We expect Hyphens Pharma's administrative expenses to increase y-o-y with increased R&D costs for the next few periods in their bid to grow their proprietary brands segment. In addition, we expect distribution costs to increase with higher advertising and promotional expenses in their new markets.
  • As these products are developed, marketed and sold by Hyphens Pharma, gross margins from the proprietary brands segment is the highest out of the three segments.

Marginal adjustments to our earnings estimates

  • We lowered our revenue estimates marginally (FY2021E -2.9%, FY2022E -2.8%) to reflect slower sales as COVID-induced buying eases with the rollout of vaccines. However, we remained optimistic on the potential of the proprietary products and their penetration into new markets.
  • We have raised our earnings estimates slightly (FY2021E +8.7%, FY2022E 0.0%) to factor in the benefit of the extension of job support scheme, and lower distribution and administrative expenses. In addition, FY2023E estimates are introduced, which reflect 3.1% and 3.8% y-o-y growth for revenue and net profit respectively.

Maintain BUY on Hyphens Pharma at lower target price of S$0.37

Lim Li Jun Tracy SAC Capital Research | Lam Wang Kwan SAC Capital | https://www.saccapital.com.sg/ 2021-03-17
SGX Stock Analyst Report BUY MAINTAIN BUY 0.37 DOWN 0.39