An update on Nova’s latest quarter (4Q2021) results for the period 1 April to 30 June 2021. Our first article on Nova was published on 23 December 2020.

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KEY SUMMARY

1. For FYE06.2021, the Group recorded a commendable 18% growth in revenue, despite the multiple lockdowns over the past 12 months. The contribution from the House Brands segment of RM35m contributed 87% of the Group’s total revenue.

2. At the last closing price of RM0.85, Nova is trading at about 17x forward PE on our base-case assumption that the Group close FY2022 with a full-year profit of RM16.1m (FY2021 net profit was RM14.5m).

3. We favor the company’s fundamentals for its brand/products stickiness among its customers, evidenced by the stable revenue during the pandemic, the satisfactory annual return on equity (“ROE”) of ~15%, high profitability margin, and its promising prospects forward with growing emphasis on House Brands segment and development of new products for the skincare segment.

UPDATE ON LATEST QUARTER (MAR – JUN) RESULTS

The 10% increase in the Group’s latest quarter revenue was mainly due to higher sales orders from the House Brands segment. During the quarter, the House Brands segment grew by 11.9%.

However, we noticed a dilution in the Group’s latest quarter gross margins. This could possibly be due to higher raw material costs. More clarification is required from the management.

In the latest quarter, the Group’s net profit after tax improved by 26% due to non-operational profits i.e. reversal of provision for doubtful debts (RM482k) and reversal of provision for stock obsolescence (RM95k).

UPDATE ON FY2021 FULL YEAR (JUL – JUN) RESULTS

For FY2021, the Group recorded a commendable 18% growth in revenue, despite the multiple lockdowns over the past 12 months. The contribution from the House Brands segment of RM35m contributed 87% of the Group’s total revenue. The chart below illustrates the Group’s revenue contribution by business segments over the years, up to FY2021.

During the year, the Group’s profitability margin decreased from 37.8% to 36% due to:

• higher staff and administrative expenses resulting from upward salary revision;
• higher selling and distribution expenses i.e. logistic cost;
• higher marketing campaign expenses; and
• decrease in other income due to lower interests earned from fixed deposits and placement in money markets (Other income was RM1.2m and RM597k in FY2020 and FY2021, respectively).

VALUATION UPDATES

With reference to Nova’s latest results, we are projecting Group’s 1-year forward FY2022 full-year results, as below.

Assumptions:

1. FY2022 revenue is projected to grow within the range of 10% – 20%. In comparison, FY2021 revenue growth was 18% and its 5-year revenue CAGR was 10.8%.

2. FY2022 gross margin assumed to range between 68% – 77%. In comparison, FY2021 gross margin was 73% and its 5-year average gross margin was 72.4%.

3. Fixed operating cost is estimated to increase by 15% from RM11.3m to RM13.0m in FY2022. The assumption was made on the high side to be conservative.

4. FY2022 net margin assumed to range between 30% – 39%. In comparison, FY2021 net margin was 36% and its 5-year average net margin was 40%. The lower margin assumption was to consider for rising material cost and cost of operation.

5. We deem a PE valuation range of 15x – 20x as fair for the Group.

At the last closing price of RM0.85, Nova is trading at about 17x forward PE multiple on our base-case assumption that the Group close FY2022 with a full-year profit of RM16.1m (FY2021 net profit was RM14.5m).

In terms of dividends return, investors can expect an annual yield of about 2%. In previous years, the Group’s payout ratio was between 20% – 50% of its annual net profit. We expect a similar trend moving forward.

Overall, we favor the company’s fundamentals for its brand/products stickiness among its customers, evidenced by the stable revenue during the pandemic, the satisfactory annual return on equity (“ROE”) of ~15%, high profitability margin, and its promising prospects forward with growing emphasis on House Brands segment and development of new products for the skincare segment.

In our view, the current valuation of 17x forward PE is fairly valued.