ACE Market bound, Nova Wellness Group Berhad (NOVA) will be raising RM44.9m with a market capitalisation of RM174.8m. The proceeds arising from the IPO is mainly for setting up a new GMP-compliant production facility, which could see a quantum leap in earnings progressively over the next five years. We like Nova Wellness for: (i) superior margins, which are head and shoulders above its peers, and (ii) new capacity expansion to boost earnings. Our indicative TP is RM0.600 based on 15x FY19E EPS, 30% premium to closest peer due to its superior profit margins.

A home grown nutraceutical player. Over the years, the group has evolved from purely trading in animal health products into a research, production and sales of nutraceutical and skincare products. Standing testimony to their success, Nova Wellness has successfully developed and produced a number of nutraceutical products under its house brands. Presently, the group has developed 144 product formulations with 88 products sold under five different various house brands, namely ‘Nova’, ‘ActivMax’, ‘Sustinex’, ‘Novavis’ and ‘SP8’ for both the local and overseas markets.

Expansion plans to drive growth going forward. Moving ahead, the group plans a production facility next to a piece of land owned by the Group currently housing the head office and existing production facility in Sepang, Selangor. The construction of the new GMP-compliant production facility, including machineries and equipment costing RM16.5m is expected to be completed by November 2018. The construction involved two phases targeting production of functional food products and skincare products.

Quantum leap in earnings from new plant. For illustration purposes, if we extrapolate the new plant which is three times the size of the existing plant, Nova Wellness’ incremental revenue is expected to rise from an average of RM25m to RM100m. Assuming a net margin of 25- 30%, this translates to an aggregate net profit of RM25-30m implying a PER of 5.9x-7.1x at IPO price of 55.0 sen. Note that the current plant has a built-up area of 4,496 sq. m compared to the new one with a built- up area of 15,661.69 sq m. The plant is only expected to gradually ramp up over the next 3-5years.

Earnings forecast. In line with the industry sector growth rate of 11%, we forecast 11% and 19% revenue growth for FY18 and FY19, respectively. We have factored in lower margins taking into account the start-up cost incurred in construction of new GMP-compliant production facility, higher depreciation costs with the new machineries and time taken to commence operations in the new production facility and the expiration of tax exemption in FY17. Hence, we are forecasting Nova Wellness to register a net profit of RM10.3m and RM12.7m in FY18E and FY19E, respectively.

Indicative Target price of RM0.600. We value Nova Wellness at RM0.600 based on 15x FY19E EPS. We believe the stock could command a higher PER of 15x, which is at a 30% premium over closest listed peer Bioalpha Holdings Berhad 1-year Forward PER of 11x due to Nova Wellness’ superior pre-tax margin averaging 48-50% compared to Bioalpha (FY17 pre-tax margin : 17.3%). The other peer, Kotra Industries Berhad is trading at 20x 1- year historical PER.

Risks to our forecasts include: (i) slower-than-expected ramp-up in the new plant, and (ii) lower-than-expected margins.

Source: Kenanga Research - 06 Jul 2018