Despite
meeting just 39% of our full-year forecast and 33% of consensus
numbers, Hovid's 1HFY6/14 core net profit was broadly in line with
expectations as 2H should be stronger due to seasonally higher sales and
the weaker ringgit which will boost exports. No dividend was declared
as expected. We maintain our Add call, earnings forecasts and SOP-based
target price. Increased product registrations in export markets and
stronger 2H earnings could spark a re-rating.
2Q highlights
Hovid's 2Q net profit fell 13% yoy to RM3.7m because a higher portion of its sales came from lower-margin products. This led to a fall in EBITDA margin from 17.6% a year earlier to 14.4%. We suspect that EBITDA margin may also have been crimped by higher operational costs, probably due to the introduction of the minimum wage policy early last year.
Expect stronger 2H
We expect Hovid to report stronger earnings in 2H due to seasonally stronger sales. On top of that, Hovid is a beneficiary of the weak ringgit because half of its revenue is derived from export sales, which are predominantly quoted in US$. The ringgit has averaged 3.31 to the greenback YTD, 3% weaker than the average in Jul-Dec 2013. The company is also actively pushing its export sales by registering its existing products with the health authorities in the export markets. It plans to roll out 10-15 products this year, which should expand its existing 400-strong product range by 3-4%. Increased registrations of Hovid's drugs in its export markets will spur demand as more products are made available in these export markets. This will help to widen its profit margin and lead to higher profitability.
Maintain Add recommendation
We like Hovid's strong long-term earnings growth prospects as the pharmaceutical markets in Malaysia and its key export destinations are set to grow at double-digit rates, driven by ageing populations and greater access to healthcare services and medicines. Hovid remains our top pick for exposure to the Malaysian healthcare sector. Potential re-rating catalysts are increased product registrations in its export markets and stronger 2H earnings.
Hovid's 2Q net profit fell 13% yoy to RM3.7m because a higher portion of its sales came from lower-margin products. This led to a fall in EBITDA margin from 17.6% a year earlier to 14.4%. We suspect that EBITDA margin may also have been crimped by higher operational costs, probably due to the introduction of the minimum wage policy early last year.
Expect stronger 2H
We expect Hovid to report stronger earnings in 2H due to seasonally stronger sales. On top of that, Hovid is a beneficiary of the weak ringgit because half of its revenue is derived from export sales, which are predominantly quoted in US$. The ringgit has averaged 3.31 to the greenback YTD, 3% weaker than the average in Jul-Dec 2013. The company is also actively pushing its export sales by registering its existing products with the health authorities in the export markets. It plans to roll out 10-15 products this year, which should expand its existing 400-strong product range by 3-4%. Increased registrations of Hovid's drugs in its export markets will spur demand as more products are made available in these export markets. This will help to widen its profit margin and lead to higher profitability.
Maintain Add recommendation
We like Hovid's strong long-term earnings growth prospects as the pharmaceutical markets in Malaysia and its key export destinations are set to grow at double-digit rates, driven by ageing populations and greater access to healthcare services and medicines. Hovid remains our top pick for exposure to the Malaysian healthcare sector. Potential re-rating catalysts are increased product registrations in its export markets and stronger 2H earnings.
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