• We favour Nova Wellness Group Berhad (Nova) due to (i) integrated business model from product development through manufacturing and sales, (ii) strong in-house R&D capability, and (iii) expansion in local retail distributorship and global market footprint.

• Nova has successfully developed and introduced over 100 products available to independent retail pharmacies, clinics, and hospitals across Malaysia.

• Nova does not have a formal dividend policy but it has declared a dividend payout ratio of above 30% for the past 5 years. In FY23, it paid 2.1sen DPS which translated to a yield of 2.9%.

• The stock is currently trading with a P/E ratio of 15.1x, slightly below its historical average of 16.2x, indicating that the stock is reasonably valued at this juncture.

Nova's Integrated Model and R&D Strength

Nova is an integrated nutraceutical player in Malaysia. Its subsidiary, Nova Laboratories Sdn. Bhd. (Nova Lab), specializes in creating, manufacturing, and selling of nutraceutical and skincare products under its proprietary House Brands. The group also offers contract manufacturing services for nutraceutical product development and production. Besides that, Nova also possesses an in-house research and development (R&D) team that is led by Nova Lab’s pharmacists. This dedicated team is responsible for continuously enhancing the group's product portfolio by creating more efficient and effective products that align with the evolving demands of the expanding market.

A Diverse Selection of Nutraceutical and Personal Care Items

Nova offers an extensive array of products, including natural supplements for both children and adults, functional foods, medical nutrition, aromatherapy, and personal care items. Nova's product line is designed to meet the diverse needs of consumers from various demographics and lifestyles. Last year, the group successfully launched 6 new products to its NOVA brand nutritional supplements as well as 23 new products to ActivMax and Sustinex brands in combined.

Revenue Growth of 10% CAGR over the past 6 Years

Nova has maintained a steady top-line growth at a CAGR of 10.3% over the past six years, reaching RM45.5mn in FY23. This positive trend aligns with the consistent performance of its House Brand segment, the aging population, and heightened healthcare awareness in the wake of the pandemic. Nova experienced its highest revenue in FY22, with a substantial increase to RM49.14mn from the previous year's RM40.48mn, marking a 21.4% YoY growth primarily driven by higher sales volumes, especially for House Brand products. However, in FY23, the group's revenue decreased by 7.9% YoY, primarily due to reduced sales from the House Brand segment. This drop was largely attributable to decreased sales volumes, as inflation affected consumer purchasing power and spending habits.

Increasing Footprint in the Retail Market

We also like NOVA due to its ongoing expansion strategies aimed at increasing its footprint in the retail market. Nova's primary focus is to promote the group's proprietary House Brands to enhance its presence in the retail market. These strategies involve expanding the group's geographic reach by actively exploring new areas for potential expansion and increasing the number of distributors. Additionally, Nova remains engaged with consumers through its online retail platform. Over the past year, the group successfully expanded the total number of distributors selling its products across Malaysia, growing from 960 outlets in FY22 to 1,021 outlets in FY23. These distributors encompass various entities, such as independent retail pharmacies, hospitals, and clinics. Furthermore, Nova has introduced the Nova Pharmacy Licensing Programme, designed to empower its retailers to cater to customers by addressing their most pressing health needs. This initiative allows retailers to provide wellness solutions, focusing on improving customers' health, while also enhancing their role as professional pharmacists with expertise in health and nutrition. It is worth noting that, Nova is actively extending its global presence by launching the distribution of its products in the Philippines, Mongolia, and European markets. While sales in the Indonesian market are currently at a modest level, the company is working to increase its contribution from this segment. Several products are currently undergoing regulatory approval processes in Indonesia. Hence, going forward, we believe that the penetration into the European and other Asian markets should lead to higher sales and eventually an improvement in the group’s margin.

Postive Net Cash in Operating Activities

As of 30 June 2023, Nova possessed RM7.5mn in cash. The company operates without any debt and benefits from an annual government grant averaging between RM4.0mn and RM5.8mn. This consistent grant support has enabled Nova to generate ample cash flows. The group actively manages its liquidity and cash flow profiles, ensuring that it maintains optimal levels of liquidity to meet all contractual obligations when they become due. It's worth noting that Nova consistently generates positive cash from its operational activities. This financial robustness furnishes the company with a competitive edge, enabling it to navigate economic fluctuations and invest in enhancing its products and market position.

Dividend Policy

Nova does not have a formal dividend policy. However, it has declared a dividend payout ratio of above 30% for the past 5 years. In FY23, its dividend payout ratio was at 44% as Nova declared an interim dividend of 0.85sen and a special dividend of 1.2 sen per share. This translated to a yield of 2.9% based on current price.

Current Valuation: Fairly valued

Nova Wellness is currently trading with a P/E ratio of 15.1x, slightly below its historical average of 16.2x, indicating that the stock is reasonably valued at the moment. Furthermore, we believe Nova's earnings will continue to benefit from its effective execution strategy, as well as the sustained demand for nutraceutical and pharmaceutical products, driven by heightened healthcare awareness following the pandemic. Looking at the bigger picture, we anticipate that the healthcare industry's demand will remain strong due to the global aging population and the growth of medical insurance.

Source: BIMB Securities Research - 3 Nov 2023