• Hovid’s 1Q17 net earnings of RM4.0m were in-line with our full year expectation making up 19.5%.

• Earnings decreased 34.2% yoy mainly due to lower foreign exchange gain obtain compared to the previous year.

• Group revenue fell 13.7% qoq due to deferment of export shipments and lower domestic sales.

• Maintain our FY17 and FY18 earnings forecast at RM20.9m and RM24.5m respectively with target price of RM0.39. Hold Earnings affected by volatile ringgit. Earnings dropped 34.2% yoy to RM4.0m despite a revenue increase of 7.5% to RM44.1m. This is due to lower foreign exchange gain of RM0.7m for the current quarter compared to RM6.7m gain in the previous year’s quarter arising from a stronger USD against the ringgit.

Lower domestic sales affect qoq earnings. Revenue dropped by 13.7% qoq from RM51.1m to RM44.1m. The lower revenue was attributed to the deferment of export shipments and lower local sales. This resulted in earnings to drop 34.9% qoq. The lower earnings were partly due to the lower sales and a lower foreign exchange gain (1Q17: RM0.7m vs 4Q16:RM1.5m).

Outlook clouded by uncertainties in domestic economy. The outlook of the group is expected to be challenging due to the sluggish domestic economic climate. However, the negative influences in the operating environment is likely to be mitigated by the increase in capacity of Hovid’s tablet and capsule factory going online by end of December 2016 or early 2017. Additionally, as the group is actively securing new overseas market and registration of new products, these initiatives would assist the group to retain their growth momentum.

Earning forecast remains. We maintain our FY17 and FY18 earnings forecast of RM20.9m and RM24.5m respectively at this juncture. Our target price stand at RM0.39 based on 3-year weighted average of sector local peer PER of 15x. Maintain Hold as the stock offers limited upside potential.

Source: BIMB Securities Research - 23 Nov 2016