NOVA’s 9MFY24 results disappointed. Its 9MFY24 core net profit declined 18% on reduced sales and the resulting deterioration of operating scale. However, we remain upbeat on its prospects driven by higher production at its new plant and the recovery in consumer spending. We cut our FY24-25F net profit forecasts by 16% and 15%, respectively, reduce our TP by 5% to RM0.70 (from RM0.74) but reiterate our OUTPERFORM call.

Its 9MFY24 core net profit of RM9m disappointed, accounting for only 57% and 58% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from weaker- than-expected sales, we believe, as consumers temporarily held back purchases on weak spending sentiment and lower-than-expected margin. No dividend was declared which came in within expectation.

YoY, its 9MFY24 revenue fell 12%, we believe, as consumers held back purchases. Its core net profit declined by a sharper 18% on loss of operaing scale both in terms of manufacturing and marketing.

QoQ, its 3QFY24 top line was flattish while core net profit fell 24% due to: (i) we believe, cost pressure; and (ii) a higher tax rate on the depletion of deferred tax assets.

Outlook. We expect consumer sentiment to gradually improve during the year as and when more clarity emerges over subsidy rationalisation, especially in relation to RON95. Once put in place, consumers will gradually “come to terms” with it and resume spending in accordance with what they can afford. A 13% hike in the salary of civil servants from Dec 2024 and a gradual pick-up in the local economy and job market in- line with the recovery in the global economy will also help.

Meanwhile, NOVA is ramping up production at its new plant during the year. There is also earnings impact from the introduction of 15-20 new SKUs in FY23 (in additiona to 35 in FY22) including skincare products, health supplements, and Activmax and Sustinex range of functional food products such as plant-based protein including specialty Activmax for hospitals.

Forecasts. We cut our FY24-25F net profit forecasts by 16% and 15% as we moderate our annual sales volume growth assumptions to only 2-7% (from 6-9%) respectively, and lower our EBITDA margin assumption for both years to 40% (from 45%).

Valuations. Consequently, we reduce our TP by 5% to RM0.70 (from RM0.74) also to reflect the rolling forward of our valuation base year to FY25F (from FY24F). The basis of our TP of 15x FY25F EPS, is in line with its peers’ average. There is no adjustment to our TP based on ESG given a 3-star ESG rating as appraised by us (see Page 2).

Investment case. 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 - 23 May 2024