Mega Lifesciences sells health supplements under its own brand names, such as Mega We Care and Bio-Life. It also runs a pharmaceutical distribution network which covers Myanmar. 40% of Mega's revenues are generated within Myanmar. The conflict between the government and different ethnic groups seems to have increased recently. I am not a Myanmar expert, but I increasingly encounter news articles about the armed conflicts there. When I bought my Mega shares, I reasoned that none of the fighting parties would be interested in sabotaging a medicines distribution network. Nevertheless, with escalating confrontations, more and more roads, bridges, etc will become nonfunctional and hamper Mega's operations.
There does not seem to be a quick resolution to the conflicts in Myanmar. The situation is complex and could drag on for years. The Myanmar currency, Kyat, has been falling against most other currencies. It might decrease more because governments under attack often print money to finance military expenses. This could lead to hyperinflation. It looks like it will become increasingly difficult for businesses like Mega to earn money in Myanmar.
The other divisions of Mega are doing well. Revenues grow by 10% per year. ROIC and margins are high. The contribution of Myanmar activities to the overall company results is shrinking. Some investors may be interested in investing in Mega and taking on the Myanmar risk. However, looking at valuations, taking this risk should be rewarded higher. The share is not in deep value territory at a P/E = 18 and a P/S = 2.3 (based on the 21 Feb 2024 share price quote of 40.25 Baht).
Apart from the Myanmar conflict, I still struggle to comprehend the pharmaceutical distribution business in general. I don't know how big pharma companies decide on their distribution partner, and for what reasons they might switch distributors. I think that the financial cost is not the only factor here. A large pharma partner jumping ship to another distributor could significantly hurt Mega. I bought Mega Lifesciences for its over-the-counter supplements division. This division is easier to analyse. However, the distribution business comes with the deal and may come back to bite me.
I sold the Mega Lifesciences share to reduce risk. Should the share become very cheap in the future, the risk/reward will be different. For example, the results of the over-the-counter division might already be sufficient to justify the share price on its own. I put Mega on my watch list to keep an eye on it.
Lesson learned: I was already worried about the Myanmar situation when buying this share. I also knew pharmaceutical distribution was not my forte. Such doubts sink in deeper when actually owning the share. I will try to weigh such concerns better before even buying the share.
Disclosure: sold Mega Lifesciences PCL
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