Positive outlook for Hovid, but rich valuations

by **Cals** Wed 27 May 2015, 19:21

Positive outlook for Hovid, but rich valuations

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By Kenanga Investment Bank Research / The Edge Financial Daily | May 27, 2015 : 10:12 AM MYT

[size=14]Hovid Bhd ([You must be registered and logged in to see this image.] Financial Dashboard)
(May 26, RM0.49)
Not rated, with a target price of RM0.46. Hovid’s revenue and pre-tax profit for the second quarter ended December 2014 (2QFY15) came in at RM48.1 million and RM6 million respectively, mainly driven by higher sales and foreign exchange gain arising from the favourable US dollar against the ringgit.

This brings year-to-date (YTD) first half (1H) FY15 revenue to RM97.1 million and pre-tax profit to RM13.7 million.

Hovid’s prospects are predicated on new product launches, rising demand for pharmaceutical products and the increased registrations of new products in its export markets. Amplifying the positive outlook and prospects for Hovid are the growing world pharmaceutical market, underlying demographic and age trends coupled with a rise in chronic diseases, which is supportive of long-term industry growth.

Secondly, in the next several years, which will be an exciting period for generic drugmakers as patented drugs worth US$133 billion (RM481.46 billion) in annual sales currently will expire, commonly referred to as the “patent cliff”.

This enables Hovid to launch the generic versions of these drugs and expand sales. In addition, growing healthcare spending in key markets — Malaysia and other lower-middle income economies — will provide further growth prospects as healthcare bills in these countries are low by international standards and the rising affluence and improved access to healthcare services will fuel greater demand for drugs.

Due to higher-than-expected demand for its products, Hovid is building a new plant to ease capacity constraints for its tablets and capsules. The first phase of the new plant is expected to be ready and operational by mid-calendar year 2015 (CY15) to produce tablets and capsules and boost capacity by 30%. Note that capsules and tablets make up approximately 65% of Hovid’s revenue,syrups and softgels make up 15% and the balance is contributed by other products. The second phase of the new plant is slated for commercial production in 1HCY16.

The total capital expenditure incurred of RM40 million to be spread over FY15 till FY17 and will be only a small dent in Hovid’s net cash of RM15.6 million as at Dec 31, 2014. For illustrative purposes, the first phase of expansion is expected to increase Hovid’s capacity and revenue by 30% or approximately RM30 million. —Kenanga Investment Bank Research, May 26

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This article first appeared in The Edge Financial Daily, on May 27, 2015.
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