BIOHLDG has grown to become an integrated biotechnology company with businesses comprising all segments of the supply chain (eg in-house cultivation of raw materials, R&D, manufacturing, distribution and pharmacy chains). Valuations are undemanding at 8.6x FY19 P/E and 1.4x P/B (40% and 20% lower than its bigger cap peers), supported by a strong 24% EPS CAGR for FY18-20 and net cash of RM15.6m or 1.9 sen/share.

Up-and-coming integrated health supplements company. Bioalpha Holdings (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”. The group is also the operator of the largest herbal parks in Malaysia with approximately 1,300-acres in Pasir Raja, Terengganu and Desaru, Johor.

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.

Strong earnings growth and cheap valuations will cushion downside. At RM0.23, BIOHLDG is trading at consensus 8.6x FY19 P/E (about 40% below its bigger marketcap peers). Excluding the 1.9sen net cash/share (RM15.6m end March), the underlying business is only valued at 7.9x, supported by strong FY18-20 EPS CAGR of 24%, providing a sufficient margin of safety to cushion downside risks in share price.

Stable manufacturing segment. Overall, the 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 pharmacy outlets beyond Klang Valley to Perak, Kelantan, Terengganu and Johor.

Growing exports. For overseas ventures, BIOHLDG continues to sell its health supplement products in the Southern part of China (such as Guangzhou and Shenzhen) via the appointed distributors. As for the new target market comprising Muslim-majority provinces – Xinjiang, Qinghai, Shaanxi and Gansu, the Group has already appointed distributors in respective provinces and are working closely with them to promote BIOHLDG’s Halal certified products. For its Indonesian market, the Group has successfully launched several new products in 2017 and targets to launch another 6 new products in 2018.

Poised for a symmetrical triangle breakout. We expect more upside pending a symmetrical triangle breakout. A successful breakout above downtrend line near RM0.24 will spur greater upside towards RM0.255 (76.4% FR) before reaching our LT objective at RM0.275 (52-week high at 21 Sep). Key supports are situated at RM0.22 (38.2% FR) and RM0.21 (23.6% FR). Cut loss at RM0.205.

Source: Hong Leong Investment Bank Research - 19 Jul 2018