NOVA’s 1HFY23 results missed our forecast. However, we stay upbeat on its earnings outlook, especially from 2HFY23 onwards, driven by gradual ramp-up of its new plant, full-year contribution from 35 new SKUs as well as subsiding start-up cost. Despite cutting our FY23-24F net profit by 15% each and TP by 9% to RM1.00 (from RM1.09), we reiterate our OUTPERFORM call.

1HFY23 core net profit of RM8.0m missed our expectation at only 38% of our full-year forecast. The variance against our forecast came largely from a lower-than-expected sales volume.

YoY, 1HFY23 revenue fell 10% due to lower sales volume which we believe was due to slower-than-expected ramp-up in its new plant and softer promotional campaigns. Normalised EBITDA (excluding gain from land sale) fell 12% as EBITDA margin fell slightly by 1.2ppts from 49.8% to 48.6% due to start-up cost incurred as its new plant commence production. As a result, 1HFY23 core net profit declined by 17%. A 1st interim and special dividend of 0.86 sen and 1.2 sen, respectively, was declared which came in above our expectation. QoQ, 2QFY23 normalised EBITDA margin fell 5ppts to 46.1% due to start-up cost incurred arising from commercial production in its new plant. We gathered that such start-up cost has come to a tail-end. 2QFY23 core net profit declined by 14%.

Outlook. We expect growth in subsequent quarters to be fuelled by gradual ramp-up of its new plant and full-year impact from the introduction of 35 new SKUs in FY22 (compared to 15 in FY21) including 6 low glycemic index bread (croissant and sourdough bread), 6 health supplements, and 23 Activmax and Sustinex range of functional food products such as plant-based protein including specialty Activmax for hospitals. Activmax and Sustinex are house brand products developed with embedded vitamins and other nutrients to fulfill consumers’ nutritional needs. Moreove, the group has made further inroads over the past 18 months penetrating into the local public hospitals which has grown from initially 32 to presently 50-60 and presently accounts for <5% of revenue for its nutritional products. The group saw doubling of distributors to over 900 with expansion target of 1,200 by FY25.

Forecasts. We cut our FY23-24F net profit by 15% each as: (i) we cut our sales volume growth assumptions from 17-15% to 10-14% due to the slower-than-expected in ramp of its new plant; and (ii) we conservatively reduce our EBITDA margin assumptions from 50-50% to 48-49%. We roll over our valuation base year from FY23F to FY24F. Consequently, we only reduce our TP by 9% to RM1.00 (from RM1.09) based on 15x FY24F 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).

We like NOVA for its: (i) integrated business model which encompasses the entire spectrum of pharmaceutical value chain from product conceptualization 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. Maintain OUTPERFORM.

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

Source: Kenanga Research - 22 Feb 2023