Valuation / Recommendation

We have a SUBSCRIBE recommendation on OB Holdings Bhd (OBH), with an FV of RM0.29 based on 14x FY26F EPS, representing a potential upside of 20% to the IPO price. Our target PE of 14x reflects a 20% discount to comparable peer’s average, given OBH’s smaller market capitalisation. We like the stock for its competitive strength over its peers, strategic expansion plans, and healthy balance sheet with stable margins.

Investment Highlights

Competitive edge from customisations. OBH has achieved a remarkable 3-year revenue CAGR of 19.6%, driven by its competitive edge in offering comprehensive, end-to-end manufacturing services for fortified F&B and dietary supplements. This one-stop service appeals to clients seeking convenience in outsourcing the entire process. OBH further strengthens its market position by offering customised formulations and utilising its in-house research capabilities and insights into market trends. These unique offerings, which are not typically available in the industry, enhance OBH's competitive advantage, setting it apart from its peers in the sector.

New facilities and machinery expansion. OBH currently operates two factories: Selayang for both fortified F&B and dietary supplements, and Rented Serendah for fortified F&B. Due to inefficient layouts and limited floor space, OBH is building a new 105k sqft Serendah factory with optimised workflow and modern facilities (office and new laboratory for R&D). Once completed, fortified F&B operations will be consolidated there, while Selayang focuses on dietary supplements. OBH is planning to invest RM5.0m (17.4% of IPO proceeds) in new machinery to scale up production. With Malaysia's ageing population projected to rise, demand for health- related products is set to increase, positioning OBH favourably for future growth.

Margins to pick up in FY26-27F. OBH has maintained a steady GP margin of 40-43% from FY21 to FY24, primarily driven by growth in its in-house brands segment, where management effectively optimised costs to mitigate the decline in margins from third-party manufacturing services. Despite that, the PBT margin still fell from 24.0% to 17.1% during this period, largely due to increased selling and distribution expenses associated with new product launches. Looking ahead, we expect a slight decline in OBH’s PAT margin for FY25F, followed by a recovery in FY26-27F as production capacity increases and expenses normalise with larger economies of scale.

Risk factors for OBH include (1) Risks of counterfeit products; (2) Intense competition; and (3) Failure to renew licenses.

Source: Mercury Securities Research - 14 Oct 2024