INVESTMENT MERIT

- Handsome gain of 38%. Since our initial Trading Buy recommendation on Hovid Bhd (HOVID) at RM0.25 on 8-Nov-2012, the stock has performed very well with 38% appreciation. Note that HOVID share price has outperformed the FBMKLCI’s gain of 10% during the same timeline.

- FY13 earnings grew by 30% but this should have already been priced in. Note that HOVID’s FY13 net profit increased by 30% YoY to RM20.3m which was within our expectation. The earnings growth is due to 18% earnings growth in its pharmaceutical division and the exclusion of Carotech’s losses from FY13 onwards. Overall, we think that the current share price increase of 38% has already priced in the strong earnings growth. Looking ahead into FY14, we think earnings growth could slow down to 23% YoY as due to higher earnings base but it will still deliver a decent set of net profit of RM25m in FY14 due to capacity expansion.

- Take profit for now. HOVID’s valuation of 11.8x FY14E Fwd. PE appears to be slightly stretched at this juncture as compared to FBM Small Cap FY14E Fwd. PE of 9.3x. We value HOVID at RM0.365 by applying 11.1x Fwd. PE. to its FY14E EPS of 3.29 sen. Our 11.1x Fwd. PE is based on 1-year historical PER as the previous data before FY13 incorporate Carotech losses which we think do not reflect current HOVID business structure. Overall, share price upside appears to be minimal.

- But it is still a good long-term investment. Despite our Take Profit recommendation, HOVID long-term prospect remains intact as the Group is actively looking for opportunities in new overseas markets. Its emphasis in research and development (R&D) may also result in higher-margin products in the long run on better pricing power.

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 extensive international distribution network particularly in healthcare products in developing countries. Introduction of more generic drugs.

- Threats: Slower than expected drugs registration approval.

TECHNICALS

- Resistance: RM0.360 (R1), RM0.390 (R2)

- Support: RM0.340 (S1), RM0.320 (S2)

- Comments: The share price has started to pull back after the recent impressive run, judging from the overbought conditions in key indicators such as RSI and Stochastic. As a result, for short-term trading purpose, we believe this is good time to take some profit off the table.

BUSINESS OVERVIEW

Hovid Berhad (Bursa Code: 7213, HOVID) is engaged in the manufacturing of pharmaceutical and herbal products. The company is a pharmaceutical manufacturer of medicinal preparations and health supplements with more than 300 products distributed over 50 countries globally. Hovid's products include antibiotics, antidiabetics, antihypertensives, antimalarial and anti-inflammatory analgesics ranging from skin care and hair care to health beverages. Its products are manufactured in GMP compliant plants. The group’s popular products include Tocovid SupraBio and Ho Yan Hor Herbal Tea.

BUSINESS SEGMENTS

Hovid’s core business is its Pharmaceutical segment, which is involved in the manufacturing and sale of pharmaceutical products.

Source: Kenanga