Summary

• Net earnings came in below expectations. Nova Wellness Group Berhad (NOVA) 3QFY24 recorded a core PAT of RM1.8m (-39.8% QoQ, -37.3% YoY), which bring the sum to RM7.5m for 9MFY24 (-30.7% YoY). The core earnings came in below expectations, amounting to 58% and 49% of ours and consensus estimates of RM RM13.0m and RM15.4m. Key deviations was mainly due to (i) lower-than-expected revenue and (ii) higher-than-expected selling and distribution expenses.

• YTD. For 9MFY24, cumulative core PAT stood at RM7.5m, which saw a drop of - 30.7% YoY, in tandem with the -12.3% YoY drop in revenue. The weaker profit was due to the lower overall demand in its House Brand segment as well as higher operating expenses due to provision for stock obsolescence and bad debts written off. Core PAT margin declined from 30.9% to 24.4%.

• YoY. For 3Q24, core PAT dropped 37.3% YoY. The House Brand segment was flat, but OEM segment fell drastically by 67%. Meanwhile, the selling and distribution expenses rose 25%, due mainly to customer’s sales commission, sales promotion expenses and travelling expenses and extensive marketing initiatives carried out.

• QoQ. Core PAT for 3Q24 fell 39.8% QoQ, mainly contributed by higher selling and distribution expenses (+39% QoQ). Besides, according to management, the lower core PAT was also due to provision for stock obsolescence, bad debts written off and the increase in tax payable by the Group as compared to previous quarter.

• Outlook. We believe NOVA will continue to focus on driving demand in the House Brand segment and has noticed a significant sequential quarter jump of 19% in the House Brand segment. However, in view of higher overall cost incurred by NOVA going forward, that could dampen the earnings moving forward. Nonetheless, NOVA remains committed to expand its product portfolio market presence while striving for enhanced production efficiencies.

Valuation & Recommendation

• Core PAT revised downwards. As the core PAT came in below expectation, we lower the earnings by -22.6% and -19.9% to RM10.0m and RM11.2m for FY24f-25f.

• Downgrade to SELL, with lower TP of RM0.54. As the share price has rallied prior to the results, we downgrade to SELL (from Hold) with a lower TP of RM0.54 after the revision of earnings and rolling over to FY25f earnings. The target price is derived by ascribing a P/E of 14.0x to FY25f EPS of 3.83 sen. 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) slowdown on overall demand for its products due to high inflationary pressure and switching over of products to more affordable brands.

Source: Mplus Research - 23 May 2024