NOVA’s FY23 results met our forecast. Its FY23 core net profit declined by 10%, we believe, due to limited new products. This is likely to change from FY24 onwards driven by the gradual production ramp-up at its new plant, the full-year impact from 35 new SKUs and the absence of lumpy start-up cost. We maintain our FY24F net profit forecast, TP of RM0.96 and OUTPERFORM call.

FY23 core net profit of RM14.3m came in within our forecast ( consensus earnings estimate is unavailable). YoY, FY23 revenue fell 7% due to lower sales volume which we believe was due to slower-than-expected production ramp-up at its new plant and in the absence of aggressive promotional campaigns. Normalised EBITDA (excluding gain from land sale) fell 5%. As a result, core net profit declined by 10%, further exacerbated by higher effective tax rate of 24% compared to 21% a year ago. No dividend was declared which is within our expectation.

QoQ, 4QFY23 normalised EBITDA margin rose 9ppts to 49% which we believe was due to the absence of start-up cost incurred arising from commercial production of its new plant. This resulted in a 20% jump in net profit.

Outlook. We expect growth in FY24 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 six low glycemic index bread (croissant and sourdough bread), six 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. Moreover, the group has made further inroads over the past 18 months penetrating local public hospitals which has grown from initially 32 to presently 50-60, accounting for <5% of revenue for its nutritional products currently. The group also saw doubling of distributors to over 900, with an expansion target of 1,200 by FY25.

Forecasts. We maintain our FY24F net profit forecast and introduce FY25F set. Our sales volume growth assumptions for FY24 and FY25 remains at 15% and 13%, respectively.

We retain our TP of RM0.96 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, 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 - 21 Aug 2023