Strong earnings growth; Pending a downtrend line breakout

Bioalpha’s one-stop business model continues to give a competitive edge over its peers. Strong earnings growth of 49% CAGR for FY17-20 with cheap FY19 P/E at 7.9x and sound balance sheet (2.6sen netcash or 12% of share price). Pending a downtrend line breakout

Up-and-coming integrated health supplements company. Bioalpha (BIOHLDG) has grown to become an integrated biotechnology company with businesses comprising all segments of the supply chain, including the upstream cultivation of herbal plants as a source of raw materials for the in-house production of its products, R&D, manufacturing, distribution and operating a downstream retail pharmacy chain under the brand “Constant”. All of BIOHLDG’s health supplement products are Halal certified and are sold in Malaysia (52% to FY17 revenue), with Indonesia (25%) and China (23%) as main export markets. Overall, about 65% of its revenue is from the manufacturing division with the balances from retail pharmacy segment. Its best sellers include cordyceps sinensis, tongkat ali and collagen beauty products.

The largest integrated herbal farming. As the operator of the largest herbal parks in Malaysia with approximately 1,300-acres in Pasir Raja, Terengganu and Desaru, Johor, BIOHLDG aims to be fully self-sufficient for herbal-based raw materials.

Currently, it had completed the Phase I development (124 acres of land, covering 20 types of herbs) of its Pasir Raja herbal park, and commenced the Phase II development, covering a land area of 880 acres to plant over 100 types of herbs. Also, its 300-acre Desaru Herbal Park will be planted with raw herbs starting with 100- acre and 200-acre development under Phase I and Phase 2, respectively.

The Group currently has over 20 different types of high demand raw herbs and spices planted at the herbal parks, such as Tongkat Ali, Kacip Fatimah, Misai Kucing, Hempedu Bumi, Roselle, Dukung Anak, Pecah Beling, lemongrass, ginger, black pepper and soursop to name just a few.

Limited downside amid strong earnings growth and cheap valuations. At RM0.21, Bioalpha is trading at consensus 7.9x FY19 P/E (about 43% below its peers). Excluding the 2.6 sen netcash/share, the underlying business is only valued at 6.9x, supported by strong EPS CAGR of 49% from FY17-20, providing a sufficient margin of safety to cushion further sharp downside risks in share price. Overall, the Group’s outlook on its local manufacturing segment is upbeat, underpinned by increase in ODM sales and higher proportion of house brand sales through the retail arm’s contributions, with more opening of Constant phamarcy outlets beyond Klang Valley to Perak, Kelantan, Terengganu and Johor.

Overseas ventures. In China, BIOHLDG will continue to work with its trusted distributors to market and promote its healthcare products. Its newly-established subsidiary, BIOHLDG HK, will facilitate R&D activities via collaboration with local HK universities, to strengthen its presence in China. Meanwhile, increased registration of new products will also support sales in Indonesia.

More upside pending a downtrend line breakout at RM0.225. After tumbling 32% from 52-week high at RM0.28 (22 May 17) to a low of RM0.19 (4 Apr), BIOHLDG share prices staged a relief rally to a high of RM0.23 (17 Apr) before ending lower at RM0.21 last Friday. After a brief consolidation, the stock is expected to stage a downtrend line breakout above RM0.225, with higher upside targets at RM0.245 (200d SMA) and RM0.265 (10 Jan high) before reaching our LT objective at RM0.28. Key supports are situated at RM0.20 psychological support and RM0.19. Cut loss at RM0.185.

Source: Hong Leong Investment Bank Research - 2 May 2018