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Institutional Sales Department |
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HOVID (7213)
|
|
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RM0.26
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|
Market
Cap:
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RM194.3mil
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Major
Shareholders
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|
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Shares
Outstanding
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762.1mil
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Sue San Ho
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41.52%
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Free
Float
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57.4%
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Book
Value
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RM0.14
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Key
Highlights from Meeting with Andrew Goh (CFO):
- Pharmaceutical portfolio covers more than 350
different types of generic drugs, OTC and dietary supplements which are
exported to more than 45 countries and is a supplier of UNICEF and UNRWA.
- 60% of its revenue comes from manufacturing of
tablets and capsules with no single product commanding more than 5% of
revenue.
- Malaysia contributes 40% of revenue, with next
highest from Nigeria (15.5%), Singapore (6.4%).
- Malaysia growth has been stable with last FY
growing at 7%, but management sees greater potential in overseas markets with
Asia sales excluding Malaysia (+20%) and Africa (4%). Africa saw a slower
growth partly due to capacity constraint which management has addressed.
- On average, 60 products are in the R&D
pipeline with 10 new products being registered with the MOH. Hovid’s strength
lies in its distribution network and product ranges. On average only 6-7
products gets approved per year thus it requires around 15 years before a
pharmaceutical manufacturer hits economic of scale in a particular country. Countries
such as HK (126 products), Cambodia (122 products), Singapore (71 products),
Nigeria (67 products) has given Hovid the scale and capability to provide a
one-stop solution.
Financial
Performance
- Over the last 3 years revenue grew 13%, with
Ebitda up 16% and net profit +21%. Improvement in bottomline is due to increase
in revenue and also operational optimisation. Hovid has undergone “Lean
manufacturing” over the past 3-4 years where less staff is required and more
machineries are automated.
- 1QFY13 saw pharmaceutical PBT 9.5% lower due
to an RM1.2mil swing in FOREX. Management do not hedge its USD exposure as their
raw material which constitutes 40-45% of total cost is imported. Government’s
plan to set a minimum wage is likely to see less than 5% impact in the short
term as management intend to pass on the cost.
- Since 22 Dec 2011, Carotech no longer
contributes to Hovid after management’s decision to distribute carotech shares
as dividend in specie.
Growth Prospect
- Phase 2 of Palm Tocotrienols research and
clinical trials is almost complete with significant results seen. This patented
product reduces brain damage from stroke and reduction in fatty liver. Phase 3
will start next year with human trials on 300-400 subjects. This is expected to
be completed in 2-3years. This would give Hovid a significant boost as
Tocotrienols will be sold as a medical product prescribed by doctors instead of
being sold as Vitamin E at current stage. This would also allow Hovid to
penetrate the US market.
- Over the next 5 years, USD500bn in patented
products are coming off patent. This allows Hovid to penetrate and produce
greater scale of products.
Conclusion
Hovid continues to be a market
leader in Malaysia for producing off patented products through its R&D. Hovid
could be a M&A target given its international network while MNC seek to
acquire generic drug producers to protect its margins from patented products
going off patent. Currently trades at 8xJunFY13PE compared to Pharmaniaga at
11.5x. Management has also guided for a dividend by mid June 2013. We believe
10-12xPE is reasonable given its expected double digit growth for coming years.
Buy in a defensive sector with TP: RM0.36