BSTEAD ... Jun10

S&P Recommendation: Buy

Recent Developments
• Boustead has entered into a conditional agreement with UEM Group Berhad to acquire the latter’s entire 86.8% equity interest in Pharmaniaga (PHRM MK, MYR5.10, Hold) for MYR534 mln (MYR5.75 per share) in cash. Upon completion of the acquisition, Boustead will make an MGO for the remaining shares in Pharmaniaga but intends to
maintain Pharmaniaga’s listing status.

• Pharmaniaga holds the concession for the distribution of medical products to government hospitals. The concession was recently extended by another 10 years to December 2019. The group also manufactures generic pharmaceuticals and supplies medical products and equipment in Malaysia and Indonesia.

• Boustead has been involved in the pharmaceutical business since 2005 via 51%-owned Idaman Pharma Manufacturing Sdn Bhd (IPM), which has been working together with Pharmaniaga. IPM manufactures and distributes pharmaceuticals but its contributions to Boustead group earnings are still small. IPM is one of Pharmaniaga’s medical suppliers and was awarded Pharmaniaga Best Supplier on Adoption Scheme program for three consecutive years (2007-2009) due to timely delivery and quality services. IPM, which acquired Pharmaniaga’s penicillin plant in Perak in 2009, is the only penicillin manufacturer in Malaysia. Thus, there is synergistic potential from the
integration of IPM and Pharmaniaga operations.

• We view the acquisition price, which is at 9.8x our projected 2010 earnings for Pharmaniaga, and is a 4.5% premium to our 12-month target price, as fair. The acquisition is targeted for completion in 4Q10.

Recommendation & Investment Risks
• We upgrade our recommendation to Buy (from Hold) with a revised 12-month target price of MYR4.00 (from MYR3.60). The acquisition will expand the group’s exposure to the growing pharmaceutical industry, is earnings accretive and will provide a decent dividend income (yield of 5.2%, based on our dividend projection of 30 sen for Pharmaniaga and the acquisition price of MYR5.75).

• We continue to use a PER-based sum-of-parts method but raise our assigned PER for the manufacturing & services division to 9x (from 6x) to factor in the potential earnings accretion from the acquisition. We assign a PER of between 6x and 9x (unchanged) to its other business segments. The assigned PERs are at a discount to forward multiples of listed peers (in the plantation and property segments) and its own listed companies (for the finance and heavy industries divisions) to reflect Boustead’s holding company status.

• Risks to our recommendation and target price include a delay or failure for the proposed acquisition to be completed.

Earnings Outlook
• Consolidation of Pharmaniaga’s profit will make up for the loss of income from BH Insurance, which was sold in April 2010 for MYR360 mln. Boustead will use the sale proceeds plus bank borrowings to fund the acquisition. The addition of Pharmaniaga’s profit (net of higher interest costs) will lift our projected earnings for 2011 by 11.5%. Assuming zero take-up for the MGO, we estimate group net gearing will inch up to 0.69x from 0.67x at end-2009. We maintain our forecast pending completion of the acquisition.