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Author: warchest   |   Latest post: Sun, 23 Aug 2020, 6:23 AM

 

Bioalpha Holdings: Opportunity during crisis. But is it lucrative?

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On 23 July 2020, it was very heavy trade on Thursday after its wholly-owned subsidiary, Bioalpha (HK) Limited (“Bioalpha HK”), secured a RM2.1 billion health food contract for public and private sectors across Guizhou province and other provinces. It was a record breaking volume for Bioalpha since its listing in 2015 with 2.2 billion shares done, which was double its issued shares of 1.04 billion units.

Bioalpha HK entered into a partnership agreement with two Chinese partners, Guizhou Yuhexin Trading Ltd and Hainan Shifengfu Co Ltd. Bioalpha HK also entered into a supply contract agreement with Guizhou Yuhexin. The value of supplying health food and nutritional meals supplied is approximately RMB700 million per year (equivalent to RM426.7 million). Bioalpha will mainly source the required raw materials in China, based on a determined formulation. It affirms Bioalpha’s maiden step to strengthen its presence in Mainland China.

CGS-CIMB Equities Research estimated that the effective GP margins will be in the region between 2-3%, given the nature of the job. Based on this, I have tabulated a pro forma profit for FY21, after taking into contribution from supply contract and assuming the earning for FY21 would recover back to FY19 earning.  FY20 would be a disastrous year for the Company is unable to escape a significant dip in earnings this year. Hence, all the shareholders should anticipate this as it would have a negative impact on its share prices in year 2020.

   

Contribution from supply contract

         

Geographical location (RM' mil)

FY19

FY21

       

Malaysia

36.3

-  

36.3

       

Indonesia

16.5

-  

16.5

       

China

10.9

426.70

437.6

       
 

63.7

426.7

490.4

       
               

Net profit

8.91

12.80

21.71

average of 2-3% effective GP margins

No. of issued shares (mil)

   

         1,041

       

 EPS (cent)

   

2.09

       
               

PE ratio

             

- Based on 10x

   

21

       

- Based on 12x

   

25

       

- Based on 15x

   

31

       

It is too early to know whether at current price of RM0.30, the stock is overvalued or not. Is all depends on whether the Company can increase its low margins of 2-3% by either reducing the cost of sourcing of its raw materials and other operating costs for the supply contract. Bear in mind, the Company needs to source up to 100 raw materials pursuant to this supply agreement. Also, some issues as highlighted previously in my posts dated 15 and 18 July 2020 need to be clarified by the Company.

But my simple valuations based on PE multiples of 10 - 15 x are range between 21 to 31 cents. However, the Company needs to explain on the details of the initial capital requirement and how the Company going to finance it as well as plan to reduce on operating expenditures to increase the margin for this business. Is a humongous contract, but with a tiny GP margin to create a WOW factor. GP margin is not an operating profit margin. Is it revenue less direct costs attributable to the sales but the Company has other indirect costs that need to factor in as well i.e. interest cost, taxes, admin costs. Taking account this, it might be much lower than 2-3% margin. The details are too fluid at this point of time and hopefully, the Board of Directors will provide more clarity in this coming AGM

 

 

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