INVESTMENT MERIT  

- 1Q13 results improved. Hovid's 1Q13 was within our expectations, which made up 21% of our full year FY13 projection of RM23.9m. The 1Q13 net profit has improved significantly to RM4.9m from RM0.22m in the preceding quarter and RM0.5m last year after wrote-off its loss-making associate, Carotech.

- Pharma sales remained sound YoY. Without Carotech, the core pharmaceutical segment reported higher revenue to RM42.8m from RM37.1m last year as its new production line commenced in 4Q12. However, the 1Q13 PBT declined 10% YoY to RM6.4m from RM7.1m as the opex increased. On a sequential comparison, lower sales volume and the renovation cost of the plant dragged the 1Q13 PBT lower by 26% from RM8.6m to RM6.4m. Note that 1Q is a seasonally weak quarter.

- Capacity expansion to drive growth.  Going forward, we anticipate higher contribution from its export market, which currently contributes 60% to total revenue, given that more of its new products are registered overseas with an average of 10 new products generated per year. A total of RM39.0m capex has been allocated for its new tablet and capsule plant in FY13-14 to improve its economies of scale. Thus, FY13-14 net profits are expected to grow at c.9% a year.

- Trading Buy at RM0.30. Hovid's share price has risen 10% since our first recommendation on 30 Oct 2012. We reckon that there is still upside potential on the stock given  its bright prospects in FY13-FY14. Compared with the small-cappharmaceutical sector PER average of 9.1x, Hovid (trading at FY13 PER of 8.2x) is still undervalued. We are reaffirming our Trading Buy call on Hovid with an unchanged target price of RM0.30 based on FY13 PER of 9.1x.

SWOT ANALYSIS
- Strength:  Continuous input on R&D, rich products portfolio and extensive international network.
- Weaknesses:  Potential margin squeeze due to competition.
- Opportunities:  Further growth in its already rich int'l distribution network particularly in healthcare products in developing countries. Introduction of more generic drugs.
- Threats: Slower than expected drugs registration approval.

TECHNICALS
- Resistance: RM0.27 (R1), RM0.29 (R2)
- Support: RM0.255 (S1), RM0.245 (S2)
- Comments:  A bullish 'Ascending Triangle' looks to be taking shape, where a breakout above the 27 sen
resistance will likely carry the share price towards 32 sen. Traders should continue to monitor the stock and enter only on a decisive breakout of the aforementioned trigger point.

Source: Kenanga