NOVA’s 1QFY24 results missed our expectation, we believe, as consumers held back purchases after having overstocked right upon the economy reopening. However, we are still upbeat on its prospects driven by the gradual production ramp-up at its new plant. We cut our FY24-25F net profit by 13-12%, respectively, reduce our TP by 13% to RM0.84 (from RM0.96) but reiterate our OUTPERFORM call.

Its 1QFY24 core net profit of RM4.0m missed our exepctation at only 20% of our full-year forecast. The variance against our forecast came largely from weaker-than-expected sales, we believe, as consumers held back purchases after having overstocked right upon the economy reopening.

YoY, its 1QFY24 revenue fell 13%, we believe, as consumers held back from buying as they ran down their excess supplies as mentioned above. Its core net profit only declined by 6% due to a lower effective tax rate. QoQ, its 1QFY24 turnover was flattish but its core net profit rose 14% in the abscence of start-up cost at its new plant.

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.

Forecasts. We cut our FY24-25F net profit by 13-12%, respectively, as we moderate our sales volume growth assumptions from 15-18% to 8-11%.

Consequently, we reduce our TP by 13% to RM0.84 (from 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 continue to 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 - 7 Nov 2023