Hovid Bhd - 1H13 below expectations

INVESTMENT MERIT

- Weaker 1H13 result. Hovid posted a 1H13 net profit (NP) of RM9.1m, which was below our expectations, making up only 38.6% of our full-year earnings estimate of RM23.7m. The group’s 1H13 PBT dipped by 26.1% YoY to RM11.8m from RM14.8m despite a higher revenue achieved. This was mainly caused by a lower PBT margin of 13.7% (vs 19.1% a year ago) that led by the higher staff cost, operating expenses and promotion activities. Note that the higher staff cost was due to an annual salary increment for the company’s staff force. 

- Neglible impact to the minimum wage policy. The new recent new minimum wage policy has caused an increase in the company’s payroll cost by 10.0% or RM0.1m a month (c.RM1.2m per annum) from Jan 2013 onwards. However, we expect this factor to have a minimal impact to Hovid’s overall earnings. Hovid is also continuously investing in new technology and research and development, which will reduce its dependency on labour in the future through higher production efficiencies. 

- Prospect remains intact.  We believe the group’s prospect remains intact with its continuous effort in exploring new overseas markets and introducing and registering new products. Meanwhile, the operation of its new plant, which is located next to its existing plant and will be commenced in FY13-14, provides the group with a higher capacity to cater to new overseas markets.

- Still a Trading Buy but with a lower TP of RM0.26. Post the 1H13 results, we have trimmed our FY13-14 NP projections by 14.3% and 14.7% to RM20.3m and RM22.1m respectively. Valuation-wise, the group is still trading at an undemanding FY13 PER of 8.5x, lower than the small cap pharmaceutical sector’s average PER valuation of 9.3x. Thus, we are maintaining our Trading Buy call on Hovid but with a lower target price of RM0.26 (from RM0.30 previously), based on a FY13 PER of 9.3x, offering 13% upside from here.

SWOT ANALYSIS

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

- Weaknesses:  Potential margin squeeze due to competitions.

- 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: RM0.27 (R1), RM0.29 (R2)

- Support: RM0.215 (S1), RM0.195 (S2)

- Comments:  Hovid’s technical picture has deteriorated since our last “On Our Radar” write-up. However, the share price should be able to find decent support at the  long term trendline at 21.5 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 its additional production capacity and increased output as a result of the higher demand from its customers.

Source: Kenanga