Is The Rise In Drug Stock Prices Sustainable?

AFTER going through a sustained phase of accumulation, following the announcement of the movement control order (MCO), pharmaceutical stocks saw a sudden surge in prices during the week.

They have seen strong gains after traders and investors drove up their prices in expectations of a Covid-19 vaccine that would be available in the near future.

However, in the latter part of the week, their share prices fell, but still closed higher than when they were before the week began.

Gains in this group of stocks have seen shares such as Pharmaniaga Bhd rising by as much as 530% from its March-MCO low of 88 sen, while Duopharma Biotech Bhd has risen by as much as 260% from its March-MCO low of RM1.02.

Other stocks that are in the same category also saw some gains, although their role in a potential Covid-19 vaccine supply chain has not been ascertained yet.

They include Apex Healthcare Bhd, Kotra Industries Bhd, and YSP Southeast Asia Holding Bhd.

A fund manager with a local bank who had bought some of these stocks during the accumulation phase of the rally says that he had already sold all of his holdings following the sudden surge in their prices.

The surge in interest and price of these stocks happened after researchers at Oxford University and AstraZeneca reported positive developments and data for the eventual development of a Covid-19 vaccine.

The World Health Organisation then said that it was good progress but also noted that there was still a long way to go before an actual vaccine is realised.

Other countries have also recorded some good progress in regard to the development of the Covid-19 vaccine.

The China National Pharmaceutical Group (Sinopharm) said late in the week that its vaccine could be ready for use by the public by the end of 2020.

Commenting on the rise of the drugmaker stock prices, Pong Teng Siew, the former head of research of a local brokerage, tells StarBizWeek that some of the locally listed pharmaceutical companies appear to be trading at reasonable valuations.

“They are lower than what I am prepared to ascribe in terms of valuations of earnings multiples. So, I believe a bit of a catch-up happened as the week progressed, ” Pong says.

“In a bullish market, there tends to be rotational sector plays, as otherwise the bull market cannot be sustained. It needs a variety of sectors to rotate for new leadership, ” he adds.

Not everyone agrees, though, as fund manager and CEO of Areca Capital Danny Wong tells StarBizWeek that he believes these locally listed pharmaceutical stocks have ran ahead of their earnings.

“On the basis that the actual creation and distribution of a vaccine is still some way to go, I think their prices have run ahead of themselves. I think it’s a bit too premature and theirs is unlike the glove makers, which can immediately capitalise on the demand (for gloves), ” Wong says.

“Before the surge in prices, their valuations were reasonable, but after the two days (Tuesday and Wednesday), the price jump was too big and this is likely due to retailers who are looking to buy, ” he adds.

CGS-CIMB says in its report on Pharmaniaga that it has made no change to its earnings estimates for the company yet.

“We have made no changes to our earnings estimates, as we have not factored in the potential contribution from the fill-and-finish works for the Covid-19 vaccine, pending further details, ” the research house says.

Following the rally earlier in the week, CGS-CIMB has downgraded Pharmaniaga to a hold from an add (or buy equivalent) with a raised target price of RM3.40.

“We think its 12-month forward price to earnings (PE) ratio of 18.2 times, which is above its 10-year mean, appears to have adequately priced in any positive impact from the Covid-19 fill and finish contribution, ” it says.

“We, nonetheless, have raised our PE peg from 10.5 times (-1 standard deviation of its 10-year mean) to 16 times (close to its five-year mean) to factor in potential margin accretion from higher manufacturing segment contribution versus being reliant on its lower-margin logistics and distribution segment currently, ” it adds.

It has estimated the potential earnings accretion to Pharmaniaga for the financial year 2021 (FY21) forecast earnings on a conservative, base-case and blue-sky scenario at +0.4%, +3.5%, and +27.9%, respectively.

This is based on a rough scenario analysis, given that the commercial terms are yet to be known.

In a bullish market, it would appear that the uncontrollable strong appetite for stocks tends to over-rule the usual tools that one would use to analyse or gauge share prices and market movements.

Source: The Star

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