Favorite Links

Wednesday, September 18, 2013

HOVID BERHAD - Return To Health


We visited Hovid‟s manufacturing plant in Chemor, Ipoh and were pleasantly surprised over the cleanliness and quality control at its GMP-certified manufacturing facility. During 2008-2011, Hovid had been weighed down by problems associated with Carotech. However, Hovid has already written off its investment in Carotech and has been lifted from PN17 status since January 2012. Hovid is now focusing on its core pharmaceutical business. We derive our fair value of RM0.29 for Hovid based on PER valuation.

Company background. Hovid has its origins dating back to early 1940s when its only product was the Ho Yan Hor herbal tea. In the 1980s, Mr David Ho, a trained pharmacist, led Hovid into mainstream pharmaceutical manufacturing. Hovid listed on the Second Board of Bursa Malaysia in 2005 and subsequently transferred to the Main Board in 2006.

Hovid manufactures and markets more than 350 different types of generic drugs, OTCs and dietary supplements to more than 45 countries globally. It prides itself in being the first to introduce Malaysian generic drugs overseas since 30 years ago. The group‟s manufacturing process is conducted under stringent pharmaceutical control which complies with PIC/S

GMP and GLP standards. It has two manufacturing facilities in Chemor and Ipoh, Perak.

Investment merits.

(i) It is currently trading at an undemanding P/E of 9.3x of trailing FY13 basic EPS or 8.4x of FY14F basic EPS as compared to its local profitable peers which are traded in the double-digit P/E;

(ii) It has a relatively strong R&D capabilities among the local pharmaceutical players with more than 20 professionals working on developing new products and special delivery systems. On average, Hovid launches 12 new products annually. Due to its strong R&D and quality control, Hovid‟s ethical drugs are well-received in the market for their efficacy and consistency;

(iii) Hovid has a wide distribution network including to more than 45 countries globally. Locally, Hovid‟s distribution channels cover private GPs, pharmacies, hospitals, Ministry of Health and etc. Globally, Hovid sells primarily to Asia (e.g. Singapore, Cambodia and Hong Kong) and Africa (e.g. Nigeria and Ghana). In particular, Nigeria accounted for RM25.3m sales (+25% y-o-y) in FY12. It is also an approved supplier to UNICEF and UNRWA;

(iv) Hovid‟s growth will be driven by its export markets which are expected to grow in the high teens to 20%. It has more than 200 products registrations that are pending approvals in Asia and Africa; and

(v) With the patent cliff during 2011-12 for blockbuster drugs such as Lipitor (2011) and Plavix (2012) as well as upcoming expiration of popular drugs patents (e.g. Nexium and Cymbalta), it will benefit generic drug producers such as Hovid.

Investment risks. Key investment risks include: (i) competition from other global generic drugs producers, in particular manufacturers in Thailand and India; (ii) unexpected contamination or accidents in its key manufacturing facilities may affect its supply chain and reputation; (iii) slower-than-expected new product registrations in foreign countries may impede its revenue growth, especially its export sales to key markets such as Nigeria; and (iv) unfavourable terms in upcoming TPPA.

Financials. For FY13(June), Hovid reported revenue of RM172.6m (+4.7% y-o-y) and net profit of RM20.3m (+29.6% y-o-y). The net profit y-o-y increase for FY13 was mainly due to the share of loss in associate (Carotech) amounting to RM9.1m (net of tax) and non-recurring items in FY12 (June). Carotech was Hovid‟s associate company up to 22 December 2011 and subsequently reduced to a simple investment to the group. Stripping out non-recurring items, the group‟s pre-tax profit was RM26.3m (+18.3% y-o-y).

As at end-FY13, Hovid had a net cash position of RM14.8m as compared to a net gearing of 0.2x as at end-FY12. Its net book value per share as at end-FY13 increased to 20.5sen from 14.0sen as at end- FY12.

Going forward, Hovid plans to expand its Chemor manufacturing facility to increase its production capacity by 30% to cater for increased export sales. Currently, its export sales accounted 60-70% of the group‟s total revenue. Hovid has at least 10 to 15 products being developed annually and plans to increase its product registration rate. In the light of its current capacity constraint at its Chemor plant, the group is tweaking its product mix to drive sales of higher-margin products.

Valuation – fair value of RM0.29. We derive our fair value of RM0.29 for Hovid using PER valuation by ascribing a P/E multiple of 12x to its fully-diluted CY14 EPS. The P/E multiple ascribed is based on average industry/peer valuation. Our fully-diluted EPS assumed the full conversion of its outstanding 381m warrants at RM0.18/warrant.

Source: PublicInvest Research - 17 Sep 2013

No comments:

Post a Comment