NOVA’s 1QFY23 results met our forecast. The strong sequential quarterly performance indicated that its recent price hikes were well absorbed by the market, and also to a certain extent, we believe on consumers stocking up health supplement products taking precautions amidst rising cases of the common flu and influenza-like illnesses. We maintain our forecasts, TP of RM1.09 and OUTPERFORM call.

1QFY23 core net profit of RM4.4m met our expectation at 21% of our full-year forecast.

YoY, 1QFY23 revenue and net profit fell 17% and 15%, respectively. However, we are unperturbed as we believe it was due to the high base effect in 1QFY22, probably on the back of introduction of new products or stronger promotional campaigns.

QoQ, 1QFY23 turnover grew 13% due to price hikes and to a certain extent, we believe, on consumers stocking up health supplement products taking precautions amidst rising cases of the common flu and influenza-like illnesses (following increased contacts within the population after the lifting of pandemic restrictions). 1QFY23 core net profit more than doubled on reduced start-up cost incurred arising from commercial production in its new plant and better overhead absorption on improved sales volumes.

Outlook. The prospect for the domestic health supplement market is strong, driven by the rising awareness for proper nutrition intake and growing ageing population. The Malaysia nutraceuticals market is projected to reach USD1,382.3m by 2027 from USD794.4m in 2020.

Zooming in on NOVA, the group guided for a 15-18% volume growth (which is consistent with our FY23F volume and ASP assumption of 17% and 2% increases, respectively), having chalked up an average volume growth rate of 16-18% in FY20-22. Specifically, FY23F volume growth is expected to be fueled by full-year impact from the introduction of 35 new SKUs in FY22.

Forecasts. We maintain our FY23F/FY24F forecasts and TP of RM1.09 based on 15x CY23F EPS, in line with closest comparable peers. There is no adjustment to our TP based on ESG given a 3-star ESG rating as appraised by us (see Page 2). Maintain OUTPERFORM.

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 original business manufacturing (OBM) business model, and (iii) earnings growth driven by capacity expansion, a widening distribution network and penetration into local public hospitals.

Risks to our call include: (i) intense competition from existing/new and local/foreign players, (ii) weak ringgit resulting in high cost of imported inputs, and (iii) product safety and regulatory risks.

Source: Kenanga Research - 17 Nov 2022