Kotra Industries Berhad has shown a notable improvement in its operating performance on a quarter-on-quarter basis, despite a challenging financial year. The company's FY24 results were in line with expectations, with a core net profit that met 102% of Kenanga Stock Broking House's full-year forecast and 95% of the consensus estimate. However, Kotra's FY24 net profit declined by 32%, largely due to reduced sales, loss of operating leverage, and the absence of a deferred tax benefit.
Analysts maintained their OUTPERFORM rating on Kotra, with a target price (TP) of RM5.35. This rating is supported by optimism surrounding recovering consumer spending, evidenced by a 7% rise in sales for 4QFY24. The company also offers an attractive dividend yield of 6%, reinforcing the positive outlook.
During FY24, Kotra's revenue dropped by 7% year-on-year, attributed to weaker consumer spending sentiment. This decline led to a more significant reduction in its EBITDA margin, which fell by 14% due to decreased production and marketing scale. The net profit decline was further exacerbated by a normalised effective tax rate of 21%, a significant increase compared to just 2% in FY23.
Despite these challenges, Kotra's 4QFY24 performance saw a 7% rise in turnover, driven by higher local and export sales. This increase, coupled with an improved product mix featuring higher-margin products, led to an 18% improvement in EBITDA and a 20% rise in profit before tax (PBT). The company's net profit surged by 83% quarter-on-quarter, buoyed by a lower effective tax rate of 26% compared to 51% in the previous quarter.
Kotra is expected to benefit from an improving consumer sentiment in FY25 as clarity emerges over subsidy rationalisation, particularly for RON95 fuel, and spending behaviour resumes following an adjustment period. Additionally, a 7%-15% salary hike for civil servants starting in December 2024, coupled with a gradual recovery in the local economy and job market in line with global economic trends, is expected to provide further support.
Kotra's prospects are also bolstered by the expanding domestic over-the-counter (OTC) market, which accounts for 50% of its revenue. The OTC market in Malaysia has experienced a 10-year compound annual growth rate (CAGR) of 11%, driven by increased out-of-pocket healthcare spending at private pharmacies.
Analysts has maintained their FY25 forecast and introduced FY26 numbers, with the valuation for Kotra's stock remaining at a TP of RM5.35 based on 15 times FY25 forecasted earnings per share (EPS), in line with the peer average. The company's investment case remains strong due to the bright prospects of the OTC drug market, its integrated business model covering the entire pharmaceutical value chain, and the superior margins of its original brand manufacturing (OBM) business model, which features established household brands like Appeton.