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 NOVAMSC (0026) NOVA MSC BHD – A supplement to consider for your portfolio

Nova Wellness Group Berhad, established since 1989, is a Group that involves in the nutraceutical industry.

In this article, we introduce a relatively young (IPO in 2018) listed company in Malaysia for discussion, and we lay out reasons why we are optimistic of the Group’s prospects for the next few years.

The Group’s principal activities are:

  1. Development, production and sales of nutraceutical and skincare products under Nova’s House Brands (“OBM segment”) and
  2. Contract manufacturing services for the development and production of nutraceutical products (“OEM segment”)

The OBM segment has always been Nova’s main revenue and profit contributor. Over the years, revenue contribution from the OBM segment has been ticking up from 66% in FYE2016 to 74% in FYE2020.

The Group currently distributes its products via 566 outlets throughout Malaysia, comprising of independent retail pharmacies, clinics and hospitals. The three categories of products that Nova manufactures are:

  1. Dietary supplements – sold under the ‘Nova’ House Brand
  2. Functional food products – sold under the ‘ActivMax’ and ‘Sustinex’ House Brand
  3. Skincare products – sold under the ‘Novavis’ and ‘SP8’ House Brand

To-date, Nova developed 144 product formulations with 88 products sold under five different House Brands. Under the OEM segment, Nova developed 88 formulations with 74 products manufactured for OEM customers under brands such as ‘Powerlife’, ‘Eastern’, ‘ActiveLife’ etc.


UPDATE ON NOVA’S DEVELOPMENT, SINCE ITS IPO IN JULY 2018

 

During Nova’s IPO in 2018, the Company raised a total of RM44.9m, of which RM33.1m / 73.7% was allocated for business expansion purposes i.e. construction of a new GMP-compliant production facility (“GMP facility”), research and development (“R&D”) on new products and expansion of presence in the retail market & online presence.

Of the remaining RM11.8m, RM9.2m was budgeted for working capital requirements and RM2.6m to defray listing expenses. Table below illustrates Nova’s utilisation of the funds to-date.

Notes:
In July 2020, Nova announced reallocation of funds initially budgeted for R&D activities towards capital expenditure investment – to purchase new machineries for the production functional food and skincare products.

1. Construction of GMP facility involves 2 phases: (a) Construction of a double-storey building (total built up 12K sq.m.) for use of office, laboratory, warehouse and facility for production of functional food products, and (b) construction of a separate facility (total built up 3K sq.m.) to cater for production of OBM skincare products. According to the Management, phase 1 construction has been completed, and production is expected to commence in Jan 2021. Upon completion, Nova’s production capacity for functional food products is expected to increase 5x, from 0.69m bottles and 0.69 m sachets to 3.43m bottles and 3.43m sachets.

2. Besides introducing its new House Brand, Novtic, to house its “personal protection” line of products, Nova is also developing a liver protection agent named, Hepar-P capsule. The product is currently undergoing the second clinical trial.

3. During FYE2020, the total number of retail outlets distributing Nova’s products increased by 24.4% from 455 outlets in FYE2019 to 566 outlets. Average transaction by consumers in retail outlet also increased by about 15% from 1.29m to 1.48m transaction.

NOVA’S GROWTH PROSPECT MOVING FORWARD

 

Following the significant amount of capital invested for business expansion in recent years, we are highly optimistic of Nova’s prospect for the next few years, for the following reasons:

  1. Agile and responsive management team. Within a short period of time since the outbreak, Nova successfully developed and introduced its new house brand, Novtic to venture into the space of “personal protection” products. The Novtic line of products include face mask, hand sanitizer, disinfectant cleaner etc. Since the outbreak, Nova have secured contracts to supply hand sanitizers to several government hospitals.
  2. Expanded supply capacity. The 5x increase in Nova’s production capacity for functional food products would ensure sufficient supply to cater for Nova’s growth for the next few years. Improved productivity and economies of scale should further contribute to better margins for Nova.
  3. Strong commitment from the Management to invest continuously on R&D of new products ensures Nova’s products are up-to-date to the market needs.
  4. Strong growth on retail distribution network ensures a wider reach of Nova’s brand and products to consumers throughout the country.
  5. Improving e-commerce presence with the launch of a well set up e-commerce website, provides consumers with a new channel to purchase its products.
  6. Expansion of product lines within the skincare segment and plans to start manufacturing its own line of skincare products should contribute to better margins in near future.
  7. Geographical expansion into regional countries. Nova’s business has predominantly been in Malaysia, the Management informed that they are looking to make inroads regionally. The Company has obtained approval for some of its products in Indonesia and Thailand, and had appointed an agent in Bangladesh to assist with distribution of its products.

HOW IS NOVA PERFORMING FINANCIALLY?

 

Over the past 5 years, Nova’s revenue grew at cumulative average growth rate (“CAGR”) of 9.0% p.a. In the recent 2 years, Nova’s revenue growth accelerated at 6.6% p.a. and 27.1% p.a. in 2019 and 2020 respectively. We note that Nova’s growth was mainly supported by its growing OBM segment.

This further contributed to Nova’s improvements in gross margins, which recorded a solid 77.6% in FYE2020.

Having said the above, however, Nova’s net margins were in fact declining over the years, from a high of 44.2% (normalized based the standard corporate tax rate of 24%) in FYE2016 to 37.8% in FYE2020. The decline can be attributed to several reasons:

  1. Increase in staff cost and directors’ remuneration;
  2. Increase in operating expenses due to higher R&D expenses; and
  3. Increase in selling and distribution expenses incurred on the wider distribution market

Moving forward, monitoring the rate of Nova’s growth in revenue / profit over the rate of increase in fixed operating cost would be key. A steeper increase in operating cost over Nova’s growth in new sales will provide a good indication of Nova’s growth sustainability.

Note: FCF = CFO less net cash flow from investing activities

Cashflow wise, Nova shows strong and consistent ability to generate positive cash flow from operations (“CFO”), with an average CFO to Net Income of about 0.9x.

However, its free cash flow (“FCF”) to net income ratio were slightly below average in recent years, due to the higher investments on capital expansion and R&D expenses.


MAJOR SHAREHOLDERS AS AT 15 SEPTEMBER 2020

 

The founders, Mr Phang Nyie Lin and his wife, Tan Sok Mooi, collectively own 74.31% of the company. They own the stakes via their names and other family members, namely Phang Yeen Aun, Phang Yeen Nung and Phang Yeen Hung.

Mr Phang Yeen Nung, 38 years old and Mr Phang Yeen Aun, 34 years old whom joined the Group in 2012 and 2011 respectively are currently holding the position as the Executive Director of the Group, focusing on setting and implementation of the Group’s business strategies.

There are no institutional shareholders holdings in the Group.

On 7 September 2020, Nova proposed to undertake a transfer of the listing from the ACE Market to the Main Market of Bursa Malaysia. The application in relation to the Proposed Transfer has been submitted to the Securities Commission Malaysia on 11 September 2020.


KEY RISKS FOR CONSIDERATION

 

  1. Declining margins as increase in sales & marketing and operating expenses outpaced growth of the Company’s revenue / profit
  2. The business may be adversely affected in the event of product defects, product liability claims, and product recalls
  3. The business is exposed to risk of unsuccessful pre-clinical and clinical trials, which will result in the impairment of R&D investments
  4. Highly competitive landscape with numerous products and brands in the market

HOW MUCH IS NOVA WORTH?

 

Given there are no direct comparable peers listed in Malaysia, we would benchmark Nova’s valuation to companies of similar business, products and/or services, as below:

Nova Performance V7

Our consideration for valuing Nova at 20x – 25x PE includes:

  1. Nova’s impressive profitability margins compared to the other peers
  2. Nova’s healthy and consistent ROE about 15% over the years
  3. Nova’s size in terms of business operations and revenue is much smaller compared to the rest
  4. Nova having high possibility to be transferred to the Main Board within the next 1 – 2 months, which should improve its shares marketability

RECOMMENDATION


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