TRADING BUY Maintain
Price RM0.26
Target RM0.30
norfauzi.nasron@osk.com.my
August 28, 2008
The FY08 results came in line with our expectation. Y-o-y the topline jumped by almost 15% but net profit fell 28.4% on higher raw material costs, especially rising CPO and Active Pharmaceutical Ingredient (API) prices. With the price of CPO expected to ease further, we might see some recovery at its Carotech division over the next few quarters. We maintain our forecast and TRADING BUY recommendation with an unchanged target price of RM0.30.
No surprises. The results were within expectation and it was no surprise to us that the higher price of CPO continued to squeeze Carotech’s margins, resulting in a pre-tax loss of RM1.4m for 4QFY08 against a net profit of RM6.7m in 4QFY07. With the price of CPO expected to ease further, we expect an improvement for Carotech over the next few quarters. Its pharmaceutical division continues to record stabile earnings, contributing more than 76% of PBT with a margin of 13.8%.
Moving forward. The recently proposed JV with an Indian pharmaceutical company is expected to support the growth of its pharmaceutical division, which will see its current capacity double with a corresponding increase in its product range. This will enable the Group to further penetrate the Indian market and enhance its cost efficiency due to lower labour cost and possibly cheaper API prices since India is one of the world’s leading producers of API. With the easing CPO price over the past few weeks, we believe there will be some relief for Carotech over the next few quarters considering that CPO accounts for 80% of its total cost.
Maintain TRADING BUY. Although the future outlook for Carotech is less cloudy due to the falling CPO price, we believe it is too early for us to factor in lower material cost since the downtrend in CPO price may be for the short term and could potentially rebound. Hence, we maintain our forecast and TRADING BUY recommendation with an unchanged target price of RM0.30.
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