Ace Market bound BioAlpha is at its growth stage, amplified by its current expansion plan and on-going activities that include going upstream in manufacturing feedstocks for its end-products, production of new formulations and construction of a processing plant. We are positive on the company’s prospects underpinned by its: (i) expansion plans to drive growth going forward, (ii) venture into the Middle East market, targeting to enter UAE in 2Q 2015, (iii) development of 30 new product formulations, and (iv) competitive edge by having its own herbs farm. Our fair value is RM0.24 based on 11x FY16E EPS, slightly above closest peer DXN Holdings Bhd’s privatisation PER valuation of 10x.

A health supplement player. BioAlpha is a health supplement group engaged in the manufacturing and sales of semi-finished and finished health supplement products as an Original Design Manufacturer (ODM and also through its in-house brands. Generally, ODM health supplement manufacturing activities involve undertaking the entire product development process i.e. from product formulation and sourcing of active ingredients, supplies and consumables, as well as manufacturing and packing. Bioalpha’s health supplement products comprise processed herbs, formulated ingredients, functional foods as well as herbal and non-herbal supplements, which offer a variety of health benefits, including general health maintenance, improving blood circulation, enhancing vitality, and relief of cough and sore throat.

Development of 30 new product formulations to drive growth. To drive growth, BioAlpha is targeting to develop thirty new product formulations per year. BioAlpha is expected to develop six new C. sinensis-based product formulations in 2015. These new formulations will provide health benefits such as general health maintenance and body strengthening. The development of enhanced L. rhinocerusbased product formulations will follow the successful completion of its R&D on the extraction of “polysaccharide”, a complex carbohydrate, from L. rhinoceros.

Venturing into the Middle East, targeting to enter UAE in 2Q 2015. Leveraging on the strong growth potential for its products, BioAlpha is venturing into the Middle East beginning with the United Arab Emirates (UAE) in 2Q 2015 upon successfully obtaining the necessary licenses or permits and the completion of product registration with the relevant authorities in UAE. Bioalpha expects to reap the benefits from this entry into the UAE market in FY16 due to the expected gestation period required for market acceptance of its house brand products. We are positive on this venture because the expansion will broaden BioAlpha’s geographical revenue base considering that its products are halal-certified.

Fair value of RM0.24. We expect BioAlpha to register a net profit of RM8.1m (+12%) in FY15 and RM9.9m (+22%) in FY16 underpinned by 16-18% revenue growths on the back of new product formulations and ramp up in utilisation rate. Based on our earnings estimate and a 30% dividend payout assumption (based on the prospectus, expected target dividend payout is 30%), we expect FY15E net DPS of 0.5 sen implying a yield of 2.5%. Our fair value is RM0.24 based on 11x FY16E EPS, slightly above closest peer DXN Holdings Bhd’s privatisation PER valuation of 10x, but is inline with FBMSC index’s Forward valuation of ~11x. Recall that DXN Holdings Bhd is principally involved in the manufacture and sale of health supplements via direct selling as well as cultivation of mushrooms. 

Source: Kenanga