Summary

• Nova Wellness Group Bhd’s (NOVA) 3Q23 core net profit tumbled 39.8% YoY to  RM2.9m, bringing 9M23 core net profit to RM10.9m (-24.9% YoY). The results came  in below expectations, amounting to 62.6% of our full year forecast of RM17.4m and  60.6% of the consensus forecast of RM18.0m. Key deviation was mainly attributed  to a lower-than-expected contribution from the House Brand segment.

• YoY, core net profit fell 39.8% YoY to RM2.9m, primarily resulted from (i) a decrease  in revenue from House Brand segment as compared to the higher revenue from the  OEM segment, and (ii) higher cost of sales, admin costs (employee bonus and  benefits) and other operating expenses (higher R&D costs) despite the decrease in  selling and distribution expenses due to lower salesman commission expenses in  tandem with the decline in revenue. Overall, core net profit margin shrank from  40.7% to 26.6% YoY.

• QoQ, core net profit plummeted 20.1%, resulted primarily from the (i) decrease in  sales order for the House Brand products, and (ii) increase in admin and operating  expenses.

• The House Brand segment continued to be the primary source of revenue,  accounting for 86.1% of the total revenue in the current quarter, with the OEM  revenue contributing the remaining 13.9%. The revenue from OEM witnessed an  increase of 275.2% YoY and 150.8% QoQ, as the group focused more on selling OEM  products in view of the lower demand in the House Brand segment.

• Production facilities wise, the ongoing construction of Phase 2 of NOVA’s new plant  is underway. The upcoming factory will serve as an expansion of its current  supplement and skin care manufacturing. As for the skincare manufacturing, it will  introduce a fresh lineup of products including cream, balms, ointment, and  shampoos. Since this will involve a new product range and brand, it is expected to  take approximately 2-3 years for it to establish a strong presence in the market.

• Moving forward, we expect a slower growth on NOVA’s performance as the group  navigates the post-Covid-19 landscape and global economic uncertainties.  Nonetheless, NOVA remains committed to expand its product portfolio and market  presence while striving for enhanced production efficiencies. Additionally, the group  is working on introducing new programmes for its partners.

Valuation & Recommendation

• As the reported earnings came in below our expectations, we slashed the earnings  forecast by 12.9%, 11.2%, and 15.2% to RM14.8m, RM16.6m, and RM17.8m for  FY23f, FY24f, and FY25f respectively. The forecasted earnings take into account the  slower than expected growth on the contribution from House Brand segment, as  well as the higher contribution from OEM segment.

• We remained our SELL recommendation on NOVA, with a revised target price of  RM0.73 (previous TP: RM0.75) as we rolled over to FY24f forecasted earnings. The  target price is derived by ascribing a P/E of 14.0x to FY24f EPS of 5.2 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 the possibility of supply chain disruptions,  both domestically and internationally, which may impact the availability of raw  materials. Besides, the group is exposed to foreign currency risk relating to USD as  a significant portion of its raw material purchases from abroad are denominated in  USD. Any depreciation in ringgit against USD will result in increased costs for raw  materials and packaging materials, potentially affecting the group’s margin.

Source: Mplus Research - 24 May 2023