Summary

• Nova Wellness Group Bhd’s (NOVA) 4Q22 core net profit plunged 67.1% YoY to RM1.4m, bringing its FY22 net profit to RM15.9m (+9.3% YoY). The results came in below expectations, amounting to 82.4% of our full year forecast of RM19.3m and 87.8% of the consensus at RM18.1m. Key deviation was mainly due to the lower than-expected contribution from the House Brand segment in the current quarter. Meanwhile, a final dividend of 1.25 sen per share was declared.

• Core net profit declined YoY and QoQ, primarily attributed to (i) lower sales contribution from House Brand Segment (ii) higher cost of sales, and (iii) increase in administrative expenses due to the recognition of employee benefit expenses for share options, loss allowance for doubtful debt and additional amortisation of research & development (R&D) costs resulting from commercialisation of new products.

• FY22 earnings, however improved 9.3% to RM15.9m as compared to FY21. The improvement was mainly due to higher sales contribution from House Brand segment as well as an increase in other income due to amortization of deferred income in FY22. However, the increase in top line was partially offset by the lower margins due to an increase in cost of sales.

• NOVA has around 960 outlets distributing its products currently, which is slightly below its earlier target at 980 outlets. Nevertheless, NOVA remains committed to increase its number of distributors to 1,100 in FY23 to gain more market share. We believe the additional market share brought in by new distributors will be the key driver for NOVA’s growth.

• On existing distributors, NOVA strives to increase the total consumer transactions and value per transaction as repeat purchases are likely to increase when the distributors understand about NOVA’s products and solutions. Do note that the total consumer transaction increased from 1.3m to 1.7m in 2019-2021, while 1H22 transactions stood at 1.1m.

• Production wise, the construction of Phase 2 of its new plant for the production of skincare products is well underway. We expect the additional capacity will allow the group to capture rising demand for nutraceutical products in the market.

Valuation & Recommendation

• As the reported earnings came in below our expectations, we slashed our FY23f and FY24f earnings forecast by 18.0% to RM20.1m and 30.4% to RM22.0m respectively, taking into account the slower-than-expected growth in the House Brand segment. All in all, we believe the increasing number of distributors, total consumer transactions and the expected improvement in margin will contribute to NOVA’s growth.

• We downgrade our recommendation on NOVA to HOLD (from BUY) with a revised target price at RM0.89. The target price is derived by ascribing a P/E of 14.0x to FY23f EPS of 6.3 sen. Meanwhile, NOVA remained committed to deliver its dividend policy of distributing not less than 30.0% of its annual net profit after tax.

• Risks to our recommendation include potential supply disruption as NOVA is reliant on local and overseas suppliers for raw material. Besides, the group is exposed to foreign currency risk relating to USD as most of its raw material purchases from overseas are denominated in USD. Any depreciation in Ringgit against USD will increase its costs of raw material and packaging material.

Source: Mplus Research - 26 Aug 2022