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Monday, July 9, 2018

Nova Wellness Group Berhad - Expansion Plans to Drive Growth

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Nova Wellness Group Berhad (Nova) is scheduled for listing on 20 July 2018. It is expected to raise approximately RM44.9m from new issuance of 81.7m shares. Nova is involved in the development, production and sales of nutraceutical and skincare products under House Brand and OEM services for manufacturing dietary supplements and functional food products. We derive our fair value of RM0.62 for Nova, based on 15x PE multiple to FY19F EPS. Key investment merits are construction of its new production plant, expansion of retail market presence and in-house R&D strength.
  • Construction of a new GMP-compliant production facility. Nova is constructing a new GMP-compliant production facility for the production of functional food and skincare products. The new plant, expected to complete by November 2018, will cost c.RM16.5m. Construction for Phase 2 is expected to complete in 4Q2018, while production operations are expected to commence by 1Q2019. Upon completion, production capacity for functional food is expected to increase from 0.69m bottles and 0.69m sachets to 3.43m bottles and 3.43m sachets. On top of that, by setting up its own in-house production for skincare products, Nova will have greater flexibility in production plans as well as focus on higher demand products and product variety.
  • Expansion of retail market presence. Nova plans to focus efforts to market the Group’s house brands in order to improve its retail market presence. Strategies include i) expansion of geographical footprint, ii) brand presence in the NWPP’s retail outlets, iii) online retail space, and iv) brand awareness campaigns. About RM5.0m from the IPO proceeds will be allocated for this purpose.
  • Competitive strengths include, amongst others, having an i) in-house R&D team which facilitates quickness to market, 2) wide range of nutraceutical and skincare products catering to diverse requirements, 3) distribution network across Malaysia, in addition to having presence in Indonesia and Thailand.
  • RM0.62 fair value. We derive a fair value of RM0.62 pegging a 15x PE multiple to Nova’s FY2019F EPS of 4.1 sen. The 15x multiple is derived from ascribing a 10% discount to average PE multiple of peers operating within the health industry. This is justified given Nova’s thick profit margin despite its small market capitalization and business scale. Earnings going forward are expected to be slightly affected due to the expiry of tax exemption, but will be cushioned by stable topline growth supported by expansion of retail market presence, new product launches as well as additional production capacity from the new plant.
Source: PublicInvest Research - 9 Jul 2018

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