HOVID (7213) - Hovid Bhd - Removing the barrier to growth
Target RM0.43 (Stock Rating: HOLD)
Hovid’s new tablet and capsule plant is scheduled to commence operations by the middle of this year. This will remove the capacity constraints the company is currently facing. However, the new plant may raise Hovid’s depreciation charges by about RM1m annually, which is slightly higher than our expectation. This leads us to reduce our FY15-17 earnings forecasts by 2-3%, which results in a marginally lower SOP-based target price of RM0.43. The stock remains a Hold. We prefer Pharmaniaga for its higher dividend yields.
What Happened
We recently hosted a meeting with Hovid’s CFO, Mr. Andrew Goh, and seven analysts and fund managers. There were no major surprises from the meeting apart from the slightly higher-than-expected depreciation charges of the new plant. Other key takeaways were 1) the first phase of its new tablet and capsule plant is on track to commence operations by mid-2015, 2) it may take 4-5 months to ramp up production, and 3) the second phase of the same plant is expected to start up by early-2016. The first phase will raise its existing tablet and capsule capacity by 30% while the second phase will raise capacity by 70%. Although the new plant may have excess capacity in the near term, Hovid plans to increase its tender business to fill up the idle capacity.
What We Think
Tablet and capsule products currently account for roughly 60% of Hovid’s revenue. In the past few years, capacity constraints have been one of the key factors holding back Hovid’s revenue growth. With the completion of the new plant, Hovid should return to a stronger growth path. Although the new plant may create excess capacity in the near term, we believe it will not affect Hovid’s profit margin significantly as its manufacturing expenses consist mainly of variable components. On top of that, we understand the new plant will have greater operating efficiency than the existing facility. All these reasons, coupled with Hovid’s plan to participate more aggressively in tenders, should help to improve the company’s overall profit margin.
What You Should Do
We maintain our Hold call on the stock. While we continue to like its earnings growth prospects, we believe this has been priced in following the 24% surge in its share price since the beginning of the year. We would turn more positive if the company achieves stronger-than-expected sales growth and a better-than-expected profit margin.
Source: CIMB Daybreak - 26 March 2015
Target RM0.43 (Stock Rating: HOLD)
Hovid’s new tablet and capsule plant is scheduled to commence operations by the middle of this year. This will remove the capacity constraints the company is currently facing. However, the new plant may raise Hovid’s depreciation charges by about RM1m annually, which is slightly higher than our expectation. This leads us to reduce our FY15-17 earnings forecasts by 2-3%, which results in a marginally lower SOP-based target price of RM0.43. The stock remains a Hold. We prefer Pharmaniaga for its higher dividend yields.
What Happened
We recently hosted a meeting with Hovid’s CFO, Mr. Andrew Goh, and seven analysts and fund managers. There were no major surprises from the meeting apart from the slightly higher-than-expected depreciation charges of the new plant. Other key takeaways were 1) the first phase of its new tablet and capsule plant is on track to commence operations by mid-2015, 2) it may take 4-5 months to ramp up production, and 3) the second phase of the same plant is expected to start up by early-2016. The first phase will raise its existing tablet and capsule capacity by 30% while the second phase will raise capacity by 70%. Although the new plant may have excess capacity in the near term, Hovid plans to increase its tender business to fill up the idle capacity.
What We Think
Tablet and capsule products currently account for roughly 60% of Hovid’s revenue. In the past few years, capacity constraints have been one of the key factors holding back Hovid’s revenue growth. With the completion of the new plant, Hovid should return to a stronger growth path. Although the new plant may create excess capacity in the near term, we believe it will not affect Hovid’s profit margin significantly as its manufacturing expenses consist mainly of variable components. On top of that, we understand the new plant will have greater operating efficiency than the existing facility. All these reasons, coupled with Hovid’s plan to participate more aggressively in tenders, should help to improve the company’s overall profit margin.
What You Should Do
We maintain our Hold call on the stock. While we continue to like its earnings growth prospects, we believe this has been priced in following the 24% surge in its share price since the beginning of the year. We would turn more positive if the company achieves stronger-than-expected sales growth and a better-than-expected profit margin.
Source: CIMB Daybreak - 26 March 2015
