BIOHLDG (0179) – A turn of the tide, supernormal growth incoming?

Dear followers,

BIOHLDG has been in my monitor list for a very long period of time, and their recent announcement of vaccination test kit supply has been the last straw to hold in my urge to invest in the company. I will share with you some of the key pointers of why BIOHLDG is a worthwhile investment, as well as some key concerns of investors on the company, since I had monitored the company long enough, I think this article can address all, if not most of investor’s concern.

BIOHLDG Principal Activities

BIOHLDG is an integrated health supplement group that was listed on ACE Market since 2015. The company had a total of 1,303 acres of herbal park in Terengganu & Johor and had their own R&D department for formulation of health supplement products. Besides that, the company had served as an ODM player for some of the well-known health supplement brands in Malaysia. They also operate a total of 14 Constant Pharmacy outlet across Malaysia, retailing a mix of their own products as well as other pharmaceutical and healthcare related products.

Also, it is important to note that the company’s products are fully compliance to the Halal requirements, they are also one of the few healthcare-Shariah-compliance stocks in Malaysia.

With them being the largest herbal farming, a.k.a. upstream herbal planting player in Malaysia, we could expect them to have a pretty good profitability in the market. Unfortunately, the COVID-19 had heavily impacted both their operations, the supply end as well as the demand end. However, BIOHLDG had turned profit after 4 consecutive loss-making quarters, and I think that is one important point to note.

You may refer to the below EPS-to-share price comparison for a better understanding of the company.

A Profitable Five-Year Contract With China

On July 22^nd (Coincidently, it has been almost a year since I first noticed the company), the company announced that they secured a five-year contract with the value of 2.1 billion MYR to supply ingredients for health food and nutritional meals to private, and public sectors in China.

This will equate to an approximate 420 million MYR in revenue, and with the said gross margin of 3% to 5%, the company would rack in around 12.6 million and 21.0 million in gross profit per annum. If you take that into consideration, the contract should be paying off a 105 million in revenue per quarter. Why hasn’t BIOHLDG show the results yet?

Do note that due to the lockdown of the country, the management had not been able to utilize the contract and travel to China for the deal. This is very sad as I believe BIOHLDG has the potential to at least double to triple the revenue contribution from Bioalpha Hainan.

On a side note, one of my friends that was in the construction industry did mention that BIOHLDG wanted to expand their warehouse and distribution channels in both Guizhou province and Hainan. I believe once the lockdown restriction was removed, the expansion of the said contract could boom rapidly, and same goes for the top and bottom line of the company.

Don’t forget in the latest quarterly result, the contract had contributed significantly to the company’s turnaround from loss to profit making, with a net margin of 5.83%.

Another Profitable Supply of COVID-19 Screening Products Contract

The company had on yesterday announced to partake in a 200 million MYR-ish contract to supply COVID-19 screening products and services to South Sudan. South Sudan is a member of East African Community (EAC) and had a population of approximately 11 million. Most people do not know, but if you had noticed the supply of products by BIOHLDG, they did partake in supplying Rapid Test Kit (RTK) and Polymerase Chain Reaction (PCR) to the local market, and these products are mainly sourced from China market.

The ministry of health of South Sudan had appointed Crawford Laboratory as the joint-venture partner for BIOHLDG in the supply of COVID-19 screening products. South Sudan had plans to setup a COVID-19 screening station in both Juba International Airport and Nimule Border Checkpoint respectively. So far, the RTK price around USD 20 by locals and USD 50 by foreigners. As for the PCR, the price is USD 40 by locals and USD 69 by foreigners, the expenses are paid by inbound visitors to the country.

PCR is an advanced testing product which could generate COVID-19 screening results within a short span of 40 minutes. So far, the general gross profit margin for these products could range between 10% to 12%. The delivery of the said COVID-19 screening products would begin in early August, or next week if everything went smooth, and on-top of the that, they would provide professional training on the screening products.

So how did the number 200 million MYR-ish add up? This was on the basis of first order by the South Sudan of 100,000 COVID-19 RTK, and it would equal to 2 million USD per month, and since the deal was lasting up to 24 months, it would amount to 48 million USD. At the point of writing, every 1 USD equates to 4.23 MYR, so you would roughly arrive at the final figure of 200 million MYR in revenue. With the gross margin of 10% ~ 12%, I believe one could roughly figure out the end profit for the company.

Potential Dilutive Effect?

At the point of writing, BIOHLDG had approximately 1,184,500,000 number of outstanding shares so far. This is inline with the recent rights issue of the company, and the company had 457,078,472 ICPS on market for now, and accounting for the SIS as well as warrants, the company could have a maximum 1,831,701,961 in number of outstanding shares.

So, let’s make some simple calculations here.

Pre COVID-19 level profitability:

FYE 2016 – 8.8 million MYR

FYE 2017 – 8.1 million MYR

FYE 2018 – 12.0 million MYR

FYE 2019 – 9.0 million MYR

FYE 2020 – (37.1 million MYR) Post COVID-19

From the results, we could take a middle profit of 10 million MYR per annum should the market recover to the normal standards. And the China contract could contribute up to 4.2 million per annum on a minimum basis.

2.1 billion MYR ÷ 5 years = 420 million MYR / annum

420 million MYR per annum * 1% net margin (ultra-conservative figure as gross is very close to net figures) = 4.2 million MYR

South Sudan had a gross margin of 10% ~ 12%, so if we take have a 5 million MYR in net profit per annum.

200 million MYR ÷ 2 years = 100 million MYR per annum

100 million MYR * 5% net margins = 5 million MYR per annum

However, there is a sharing to Crawford Laboratory in terms of top and bottom line. Despite the management did not disclose the information, we could estimate a conservative JV ownership of 50:50 as BIOHLDG will provide the financial muscles to the whole deal. So cut the 5 million MYR in bottom line per annum, we would arrive at a 2.5 million MYR per annum in bottom line.

Total – 10 million MYR (normal profit) + 4.2 million MYR (China contract) + 2.5 million MYR (South Suden contract ) = 16.7 million MYR

If we dividend 16.7 million MYR by 1,831,701,961, the EPS would be roughly 0.009117. So if we take the closing price of 0.225 on yesterday, the P/E ratio would be 24.68 times.

Bear in mind that the figures are very conservative in nature, and from FYE 2017 to FYE 2019, the company P/E ratio is trading between 27 times to 40 times. A median P/E would be 33.5 times and with that in mind, even with the maximum dilution in effect, the fair value of BIOHLDHG should be at least 0.305, representing a 35.56% in margin of safety.

Conclusion

With all the studies I had done on BIOHLDG, now the share price is at a relatively safe level. The expansion of the company is in theme, and I believe this is a new starting point for BIOHLDG – not the end. But ultimately, the investment decision is your choice!

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