Summary

• Below expectations. Nova Wellness Group Berhad (NOVA) 2QFY24 core PATMI came in at RM3.1m (+17.8% QoQ, -62% YoY), which bring the sum to RM5.7m for 1FY24 (-28.2% YoY). The core earnings came in within expectations, despite only amounting to 44% and 33% of ours and consensus estimates of RM13.0m and RM17.7m, respectively as we believe demand should pick up in 2H24.

• YTD. For 1HFY24, cumulative core PATMI stood at RM5.7m, which saw a drop of - 28.2% YoY, in tandem with the -13.9% YoY drop in revenue. The softer profit was due to the weaker demand in the House Brand segment, where it dropped -20% to RM18.0m vs. RM22.4m in 1HFY23. Meanwhile, other operating expenses and selling & distribution expenses increased slightly, while administrative expenses fell. Core PATMI margin stood at 27.4%.

• YoY. In 4Q23, revenue declined -14.9% YoY amid weaker demand for the House Brand segment, decreasing 29% YoY to RM8.1m. Meanwhile, revenue from the OEM segment added more than 250% to RM2.1m for the quarter.

• QoQ. Core PATMI increased 17.8% from RM2.6m to RM3.1m despite a marginal drop of 2.2% in revenue, mainly contributed by lower operating expenses such as other expenses (-37% QoQ) and selling & distribution expenses (-17% QoQ) as compared to 1Q24.

• Outlook. We believe NOVA will focus on driving demand on the House Brand segment, but we think it will be on a gradual pace. Meanwhile, we expect the overall operating costs could steepen in tandem with the elevated USD environment.

Valuation & Recommendation

• Core PATMI forecast unchanged. As the core PATMI came in within expectation, we maintained our earnings forecast.

• Upgrade to HOLD, with unchanged TP of RM0.57. As the share price has declined significantly prior to the release of results, we upgrade to HOLD (from SELL) with unchanged TP of RM0.57, where the target price is derived by ascribing a P/E of 14.0x to FY24f EPS of 4.07 sen.

• Risks will include the (i) potential supply chain disruptions and (ii) foreign currency risk relating to USD as a significant portion of its raw material purchases from abroad are denominated in USD.

Source: Mplus Research - 21 Feb 2024