NOVA’s 1HFY24 results disappointed, we believe, as consumers temporarily held back purchases on weak spending sentiment. However, we are still upbeat on its prospects driven by a gradual production ramp-up at its new plant. We cut our FY24-25F net profit forecasts by 12% and 14%, respectively, reduce our TP by 12% to RM0.74 (from RM0.84) but reiterate our OUTPERFORM call.

Its 1HFY24 core net profit of RM7.1m disappointed, accounting for only 42% and 40% oif our full-year forecast and the full-year consensus estimate, 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.

YoY, its 1HFY24 revenue fell 14%, we believe, as consumers held back purchases. Its normalised EBITDA fell by a sharper 24% on less-thanoptimum economies of scale, both in terms of manufacturing and marketing, on reduced sales volumes. As a result, its 1HFY23 core net profit declined by 18%. No dividend was declared which came in within expectation.

QoQ, its 2QFY24 core net profit fell 24%, we believe, similarly, due to lessthan-optimum economies of scale from low plant utilisation and poor absorption of advertising expenses on reduced sales volumes.

Outlook. We believe consumer sentiment will 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 what they can afford. A gradual pick-up in the local economy and job market in-line with the recovery in the global economy will also help.

This should augur well for NOVA which intends to ramp up the production at its new plant during the year. There is also a full-year earnings impact from the introduction of 35 new SKUs in FY22 (compared to 15 in FY21) including six low glycemic index bread (croissant and sourdough bread), six health supplements, and 23 Activmax and Sustinex range of functional food products such as plantbased protein including specialty Activmax for hospitals. Activmax and Sustinex are house-brand products developed with embedded vitamins and other nutrients to fulfill consumers’ nutritional needs.

Forecasts. We cut our FY24-25F net profit forecasts by 12% and 14%, respectively, as we moderate our annual sales volume growth assumptions in FY24-FY25 to only 6-9% (from 8-11%) and lower our EBITDA margin assumption for both years to 45% (from 49%).

Valuations. Consequently, we reduce our TP by 12% to RM0.74 (from RM0.84) based on 15x FY24F EPS, in line with closest comparable peers. 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, (ii) weak MYR resulting in high cost of imported inputs, and (iii) product safety and regulatory risks.

Source: Kenanga Research - 21 Feb 2024