C&O Pharmaceutical - We expect a lengthy transition period

We have lowered our six-month target price for C&O to S$0.12, from S$0.17, given the likelihood of limited growth due to a prolonged transition period. Our target price is based on a PER that has been revised down to 3.5x (from 5.9x), which is at a discount of 53% (from 10%) to the peer-average PER of 7.5x, and on our 12-month EPS forecast to June 2009.

We forecast C&O to record a net profit of HK$32.7m for 2Q FY09, up 29.4% YoY, due to an improvement in profit margins for its antibiotic products. However, we do not foresee anything that would change our outlook significantly for the company during the forthcoming results announcement. In our view, the company’s attempt to boost the sales of its new products and reduce its reliance on the maturing Amoxycillin, which accounted for about 40% of sales and gross profit for 1Q FY09, will take some time.

While C&O’s share price has corrected considerably over the past few months and is trading at a relatively low PER, we still do not find it attractive. We see better investment options, such as Wuyi, which we believe offers better sales- and earnings- growth prospects and more clarity on its outlook, and is trading at a similar PER.

Sponsored Links