KUALA LUMPUR: There is an attractive proxy for growth in over-the-counter (OTC) and ethical drug spending among Malaysians, and Kotra Industries Bhd will likely benefit from this trend.
CGS-CIMB Research, in a report, said out-of-pocket spending on private pharmacies in Malaysia should rise further due to improving affluence and health awareness.
Local generic ethical drug sales may also continue to grow, as generics made up only about 45-50 per cent of total ethical sales at the end of 2018 and are priced 3x lower than foreign originators on average.
Kotra is a key beneficiary, with its good brand and production capacity utilisation of only 35-40 per cent, the research firm noted.
"Listed on the main market of Bursa Malaysia, we estimate Kotra is the second-largest locally-listed manufacturer of OTC pharmaceutical products by 2021 revenue.
"OTC products (Appeton brand) made up 60-65 per cent of the first half (1H) 2021 revenue," the research firm noted.
Kotra also produces generic ethical (prescription) drugs in various dosage forms, which form the remaining 35-40 per cent of sales. It operates two production facilities in Melaka.
Further, CGS-CIMB Research noted that Kotra aims to deepen its presence in existing export markets, particularly in ASEAN and Africa, by expanding its product portfolio and bidding for more government tenders.
"We see the gradual reopening of borders and easing of supply chain and logistical issues sequentially lifting export sales in FY23, aided slightly by the weak RM/US dollar," the research firm said.
"We believe Kotra's competitive advantage lies in its strong Appeton OTC brand, built via sizeable, sustained and strategic advertising and promotion investments.
"In addition, Kotra's use of analytics capabilities to plan and evaluate marketing campaigns may also be an advantage," the firm said.
CGS-CIMB Research said this has allowed it to garner better pricing power, with its products priced at a 5-89 per cent premium to comparable products from peers.
"As per channel checks, we think this has led to its superior return on equity (ROE), which is forecasted to be 20.9 per cent in 2023 versus the Malaysian pharma sector that averages about 14.6 per cent, including Apex Healthcare," CGS-CIMB Research noted.
CGS-CIMB Research initiates coverage of Kotra with an Add call and a target price of RM4.76.
"We advise investors to look past the FY23 earnings-per-share (EPS) blip and accumulate the stock for its strong brand recognition, industry-leading ROE, balance sheet strength and management quality.
"Downside risks are softer-than-expected consumer spending and a sharp rise in input costs," the firm said.