NOVA's 1QFY25 results disappointed. Its 1QFY25 net profit declined 34% on lower-than-expected margin. Going forward, its prospect is expected to be driven by higher production at its new plant and the recovery in consumer spending. We cut our FY25F and FY26F net profit by 12% each, reduce our TP by 11% to RM0.56 (from RM0.63) but reiterate our OUTPERFORM call.

Its 1QFY25 net profit of RM1.7m came in below expectations at 13% and 12% of our and consensus full-year net profit forecasts, 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 in this quarter which came in within our expectation.

YoY, its 1QFY25 revenue rose 2%. Its core net profit declined by a sharper 34%, we believe, hit by: (i) higher raw material cost and further excerbated by less-than-optimum operating scale leading to poor cost absorption, and (ii) higher tax rate on the depletion of deferred tax assets.

QoQ, its 1QFY25 top line rose 5% while core net profit rose >100% from low base effect 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 their financial ability. 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 addition 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 FY25F and FY26F net profit by 12% as we reduced our EBITDA margin assumption from 35%-37% to 31%-33%.

Valuations. Consequently, we reduce our TP by 11% to RM0.56 (from RM0.63) based on 15x FY25F EPS, is in line with its peers' average.

Our 15x PER valuation is premised on the new production plant contribution visibility, which we may reassess if ramp-up does not materialise as expected in subsequent quarters. 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, and (iii) product safety and regulatory risks.

Source: Kenanga Research - 20 Nov 2024