Hovid Bhd - Rising outlook

INVESTMENT MERIT

-  Better outlook. The share price of Hovid has risen 10% within a week to hit a 10-month high of RM0.265 after we issued our OR piece last Monday before closing at RM0.25 yesterday. We see positive catalysts after visiting its plant in Ipoh last Friday. Hence, our previous projection is still deemed to be conservative.

-  New rights issue to ease gearing.  The group’s current net gearing stands at 0.4x. We believe its proposed renounceable right issue of up to 571.5m warrants at the issue price of RM0.02 each will not only provide an option for shareholders to increase their participation but will also enable the group to raise up to RM11.4m to finance  its working capital. The rights issue will also enhance the equity base and decrease the group’s net gearing further. This will be completed in Feb 2013 after the expiry of its existing warrants.

-  Earnings projection upgraded.  In FY12A, Hovid reported a net profit of RM15.8m. However, this net profit was dragged down by a RM2.0m non-recurring item in Carotech. Including this, Hovid should have reported a net profit of RM17.8m. Besides, we also saw revenue in 4Q12 jumped to RM45.7m (+16%  QoQ,  +32%  YoY)  due  mainly  to  new  production  lines installed, which should have a full impact on FY13 earnings. As such, we are raising our FY13 projection to RM24m from RM20m previously. 

-  Decent dividend yield. So far, Hovid has no firm dividend policy. Based on our estimates, GDPS of 1.0-1.5 sen for FY13 are achievable. This translates into dividend yields of 4.0% to 6.0% based on the current share price, which is fairly decent. 

-  Upgrade to Trading Buy. The stock is trading at 8.0x FY13 PER, which is still below the industry’s average of 9.1x PER for small-cap pharmaceutical players. With our earnings revision, HOVID is now valued at RM0.30 based on FY13 9.1x PER. Upgrade to Trading Buy from Neutral. 

SWOT ANALYSIS

-  Strength:  Continuous input on R&D, rich products portfolio and extensive international network

-  Weaknesses:  Potential margin squeeze due to competition

-  Opportunities:  Further growth in its already rich int’l distribution network particularly in healthcare products in developing countries. Introduction of more generic drugs

-  Threats: Slower than expected drugs registration approval

TECHNICALS

-  Resistance: RM0.275 (R1), RM0.29 (R2)

-  Support: RM0.245 (S1), RM0.215 (S2)

-  Comments:  Following  a strong run up from 20 sen to a recent high of 29 sen, Hovid’s technical indicators look exhausted. The overall trend  remains bullish although the share price may continue its consolidation phase in the short term. Look to buy lower at 24-24.5 sen with upside targets 27.5 sen and 29 sen. 

BUSINESS OVERVIEW

Hovid Berhad (Bursa Code: 7213, HOVID) is engaged in the manufacturing of pharmaceutical and herbal products. The company is a pharmaceutical manufacturer of medicinal preparations and health supplements with more than 300 products distributed over 50 countries globally. 

Hovid's products include antibiotics, antidiabetics, antihypertensives, antimalarial and anti-inflammatory analgesics ranging from skin care and hair care to health beverages. Its products are manufactured in GMP compliant plants. The group’s popular products include Tocovid SupraBio and Ho Yan Hor Herbal Tea.

BUSINESS SEGMENTS

HOVID’s core business is its Pharmaceutical segment, which is involved in the manufacturing and sale of pharmaceutical products. In FY12, HOVID’s Pharmaceutical division recorded a  revenue of RM164.8m (+13.5% YoY) due mainly to additional production capacity and increased output as a result of higher demand from customers.  

Source: Kenanga