Hovid’s 9MFY15’s MYR15m core earnings were below expectations while 3QFY15core earnings slid 10.7% YoY due to delayed shipments. Maintain NEUTRAL and MYR0.45 TP (6% downside). Although we are positive of its commencement of a new plant by mid-2015, we believe all positives have been priced in following the strong share price performance, ie a 37% YTD surge.

• 3QFY15 (Jun) earnings were below our and consensus expectations. At the same time, 9MFY15’s MYR15m core earnings represented 69% of both our and street’s FY15F net profit. Stripping off the one-off exceptional gain from the disposal of its 51%-owned subsidiary Biodeal Pharmaceuticals Pte Ltd, which amounted toMYR1.4m, 3QFY15 earnings declined 10.7% YoY. The decline was due to a: i) 4% YoY drop in sales as a result of delayed shipments, and ii) EBIT margin compression to 12.6%
• Phase 1 of the new plant to commence by June. We understand from management that Phase 1 of the new plant is due to run by sometime inthe middle of 2015. This ought to see the tablet and capsule facility’scapacity increasing by 30% before it doubles from existing levels when Phase 2 of the plant kicks in. In addition, we expect Hovid to record an operating cost reduction once its centralised warehouse – slated for completion by end-2015, begins operations. Management expects the centralised warehouse facility to result in annual savings of MYR1m.
• Forecasts and key risks. We trim our FY15F earnings by 6.5% but make no changes to subsequent years to reflect the shipment delay. Key risks to our forecasts are: i) a delay in its new plant’s operations, ii) a high mix of lower margin product orders, and iii) slow new drug registration process.
• Maintain NEUTRAL. We remain NEUTRAL on Hovid with an unchanged MYR0.45 TP despite the earnings reduction. Our TP is pegged to an unchanged 17x fully-diluted 2016F EPS, which is an 11% discount to the average P/E of its local and regional peers at 19x FY16FP/E. While we are positive on the company’s earnings growth prospects, we believe all the positives have been priced in following the 37% surge in share price YTD.