Summary

• Results below expectation. NOVA started FY24 on a weaker tone, registering a core PATMI of RM2.6m in 1Q24. The core PATMI was down 26.0% QoQ, and 38.2% YoY. It was below our expectation of RM16.6m for FY24f, accounting for only 16%, while 13% versus consensus estimate of RM20.4m. The key deviations were mainly due to the higher cost of sales that was incurred during the quarter, coupled with the provisions made for stock obsolescence.

• QoQ. In 1Q24, NOVA’s core PATMI declined 26.0%. Revenue for the OEM segment dropped significantly by 83%, while it was offset by the increase of House Brand by 34%. However, the weaker set of core PATMI was believed to be caused by stronger USD, where NOVA’s raw material purchases and packaging materials from overseas are denominated in USD; the costs of sales for 1Q24 rose 63% QoQ. Meanwhile, the other expenses were up more than 100% on the back of provisions made for stock obsolescence.

• YoY. Meanwhile, core PATMI fell 38% YoY, due to higher costs of sales and increased other expenses due to stronger USD and provisions made for the stock obsolescence.

• Outlook. We noticed that the raw material costs have spiked up in tandem with the stronger USD environment in the previous quarters. Despite the recent weakening of USD against ringgit, overall post-Covid-19 landscape and global economic uncertainties with the slowdown in China will be challenging for NOVA to achieve a target outlets of 1,200 by end-2023. Hence, it may stretch into 2024 for that objective. Nonetheless, NOVA remains committed to expand its product portfolio market presence while striving for enhanced production efficiencies.

• Forecasts. We revise NOVA’s core PATMI downwards by -21.2%-21.8% from RM16.6-17.8m for FY24-25f to RM13.0-14.0m, respectively. The downward revision of earnings has taken into account the softer contribution from the OEM segment, coupled with higher operating costs environment.

• Downgrade to SELL, TP: RM0.57. With the downward revision in our earnings forecast, we downgrade NOVA to SELL (from Hold), with a target price of RM0.57 (from RM0.73) pegged to FY24f forecasted earnings. The target price is derived by ascribing a P/E of 14.0x to FY24f EPS of 4.07 sen. Meanwhile, NOVA has a dividend policy of distributing not less than 30.0% of its annual net profit after tax.

• Risks will include the (i) potential supply chain disruptions, which may impact the availability of raw materials, (ii) foreign currency risk relating to USD as a significant portion of its raw material purchases from abroad are denominated in USD and (iii) any depreciation in ringgit will result in increased costs for raw materials and packaging materials, potentially affecting the group’s margin.

Source: Mplus Research - 7 Nov 2023