Summary

• For 6MFY23, Nova Wellness Group Bhd’s (NOVA) booked a revenue of RM24.0m (- 9.6% vs. 6MFY22) and core net profit stood at RM8.0m (-17.3% vs. 6MFY22), mainly due to lower sales contribution from the House Brand segment. We expect moderate growth in its 2H23 performance under the inflationary environment and gradual performance improvement going into FY24 and FY25.

• Focus to remain in house brand segment. We anticipate the contribution from house brand segment will gradually increase in line with NOVA’s ongoing strategy focusing on the segment, spurred by (i) increase in number of distributors, (ii) higher contribution from current distributors, and (iii) expansion of product range. Meanwhile, for the OEM segment, we anticipate a flat growth.

• Distributor network expansion as key driver. As at 1H23, NOVA’s products are sold in close to 1,000 independent retail pharmacies across Malaysia – an increase of 40 from 960 distributors as at FY22. We expect a progressive increase in the number of distributors towards its target of 1,200 by FY25 will remain as its growth driver moving forward.

• Increase in distributors’ contribution upon maturity. Besides, we foresee an increase in contribution per distributor stemming from both repeat and new customer purchases upon maturity of around 550 distributors that were added to its network since FY20.

• Expansion of product offerings to increase value per transaction. Besides new nutraceutical products, NOVA is working to increase its skincare products offerings. The construction of Phase 2 factory is well underway, which is expected to increase its production capacity for skincare products.

• Increasing demand drives growth. NOVA’s strategy is in line with the increasing demand for nutraceutical products in Malaysia. According to Research CMFE, the Malaysia nutraceuticals market is projected to reach USD1382.3m by 2027 from USD794.4m in 2020, registering a CAGR of 8.2% in 2020-2027. Long term prospect of the industry remains optimistic.

• Pressure on operating margin. However, margin wise, we expect the rising cost of sales and operating cost in an inflationary environment will continue to exert pressure on the group’s margin. Meanwhile, do note that effective tax rate for FY22 stood around 20.6%, which is lower than the statutory tax rate of 24.0% due to the reversal of the excess tax provision for FY21 and FY22. We expect the tax rate for the next three financial years to stand around 24.0-25.0%.

Valuation & Recommendation

• In anticipation of progressive increase in number of distributors, we upgrade the earnings forecast by 2.6% and 3.4% to RM17.4m and RM19.3m for FY23f-FY24f. FY25f earnings forecast remained unchanged at RM21.0.

• We upgrade our recommendation to HOLD from SELL, with a revised target price of RM0.85 as we rolled over to FY24f earnings. The target price is derived by ascribing a P/E of 14.0x to FY24f EPS of 6.1 sen. Meanwhile, NOVA remains 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 margin erosion arising from inflationary pressure and supply chain disruptions. 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.

Source: Mplus Research - 27 Mar 2023