We initiate coverage on Nova Wellness Group Berhad (NOVA) with an OUTPERFORM call and TP of RM1.09 based on 15x CY23E EPS. We like Nova Wellness for its: (i) integrated business model which encompasses the entire spectrum of the pharmaceutical value chain covering product conceptualization starting from R&D and downstream to manufacturing and sales; (ii) superior margins due to its Original Business Manufacturing (OBM) business model; and (iii) earnings growth driven by capacity expansion, a widening distribution network and penetration into local public hospitals.

A home-grown nutraceutical player. Over the years, NOVA has evolved from purely a trader in animal health products into a group involved in research, production and sales of nutraceutical and skincare products. Nutraceuticals are products derived from food sources that provide health benefits in addition to basic nutritional value. Examples of nutraceuticals include dietary supplements, herbal supplements and functional food.

It is integrated. It has scale. It has reach. These three attributes embody the essence of NOVA’s business model. The group’s business model encompasses the entire spectrum of pharmaceutical value chain from product conceptualization starting from R&D to manufacturing and sales. The stage is set for an explosive growth for NOVA over the next three years. Amplifying the growth potential is the surge in demand for health supplement products, as consumers take a more proactive stance towards their health and well-being, especially following the COVID-19 pandemic. As an indication, the group saw doubling of distributors to 900+ with target to increase this to 1,200 by FY25. In tandem with the increase in distributors, average transaction by consumers has risen 60% since FY20. The group has over the past 12 months started penetrating into the local public hospitals. NOVA is looking to include more hospitals which presently accounts for <5% of revenue for its nutritional products.

New plant to drive earnings growth. The two plants completed in 2020 and 2022 totaled approximately 169k sq ft. For illustration purposes, if we extrapolate the two plants which is 5 times the size of the original plant completed in year 2004 (please refer to chart), its incremental revenue is expected to rise from an average of RM30m in FY19 to RM120-RM150m per annum.

Earnings forecasts. According to market research, in the long term, the global dietary supplements market is projected to grow at a compound annual growth rate of 9%. In tandem with industry sector growth, we forecast 17%/18% net profit growth for FY23/FY24. The earnings are expected to be driven by: (i) 18% revenue growth each in FY23 and FY24; (ii) ASP and volume growth of 2% and 16%, respectively; and (iii) marginally lower EBITDA margin of 48%.

Initiate coverage with a Target Price of RM1.09. We value NOVA at RM1.09 based on 15x CY23E EPS, in line with closest comparable peers. There is no adjustment to TP based on ESG given a 3-star ESG rating as appraised by us.

We like NOVA for its: (i) integrated business model which encompasses the entire spectrum of pharmaceutical value chain from product conceptualization starting from R&D to manufacturing and sales; (ii) superior margins due to its OBM business model; and (iii) earnings growth driven by capacity expansion, a widening distribution network and penetration into local public hospitals.

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

Source: Kenanga Research - 19 Jul 2022