Hovid Bhd
(Sept 1, 39.5 sen)
Maintain reduce with a higher target price of 38 sen: Excluding contribution from previously owned subsidiary Biodeal Pharmaceutical Pte Ltd in the financial year ended June 30, 2015 (FY15), the group recorded a revenue growth of 4.4% year-on-year (y-o-y) to RM189 million, while pre-tax profit declined by16.1% y-o-y to RM22.7 million.
We suspect the weaker performance was due to increase in operating expenses, higher raw material costs due to a weak US dollar and higher start-up costs for its new production lines.
However, core net profit (CNP) improved marginally by 1.9% y-o-y to RM14.3 million, thanks to a lower tax rate of 20%. Fourth quarter ended June 30, 2016 (4QFY16) revenue increased by 19.8% y-o-y to RM51.1 million as local and overseas sales rose by 14.6% and 5.2% respectively. Excluding foreign exchange gain of RM1.5 million, the group’s CNP increased to RM4.7 million.
We think the stronger CNP was attributable to a lower tax rate of 10.8%, better sales volume and the absence of start-up costs incurred in 4QFY16. We also note that 4QFY16 earnings before interest, taxes, depreciation and amortisation margin improved 0.4% y-o-y to 14.6%.
We understand that the group is slowly ramping up capacity at phase 1 of its new tablet and capsule factory. The first phase of this plant began commercial production in 1QFY16, increasing its tablet and capsule production capacity by 30%. However, this resulted in higher production costs for FY16, as we suspect that the group has yet to achieve optimal utilisation rate at this juncture.
Although FY16 earnings were slightly below expectations, we believe that earnings will improve in the coming quarters. This is based on our expectations of lower start-up costs from the new plant, as utilisation rates improve for the new production lines.
However, we lower FY17 and FY18 earnings per share by 4.9% and 6.1% respectively to account for higher raw material and operating costs.
Potential upside risks are improvement in the group’s margins or substantial pickup in sales volume. — CIMB Research, Aug 31