Hovid Bhd
(March 7, 34 sen)
Maintain reduce call with a lower target price (TP) of 30 sen: Hovid Bhd announced that the National Pharmaceutical Control Bureau (NPRA) has reissued the manufacturing licence for its Chemor plant. The plant was scheduled to resume operations yesterday, which is in line with our expectations of a 60-day hiatus for the plant. To recap, Hovid’s manufacturing licences for both its plants were suspended effective Jan 9. This was after an NPRA audit found that both plants were non-compliant with the Current Good Manufacturing Practice (cGMP).

On the other hand, the manufacturing licence for its Ipoh plant is still suspended. This is pending the required changes to comply with the cGMP. We note that the company needs to make physical changes to the plant, which may require a longer period to complete. Hovid is currently executing the necessary changes and aims to obtain the licence for its Ipoh plant by end-May, upon the satisfaction of the NPRA.

Although the delay in the reissuance of the manufacturing licence for the Ipoh plant is slightly negative, we still view this net development as an overall positive. This is due to the fact that Hovid’s Chemor plant contributes 70% of its total capacity. Hence, the group will be able to increase working shifts to offset any capacity loss beyond the original estimate of only a 60-day hiatus for its Ipoh plant. Hence, we view this as in line with our overall expectations.

Nevertheless, we still expect a weak third quarter ending March 30, 2017 (3QFY17) for the group. This is due to the two-month manufacturing hiatus for the Chemor plant as well as negligible revenue contribution from the Ipoh plant during the period. Although existing inventories were allowed to be marketed, we doubt this was sufficient to offset the negative impact of the loss of production and the inability to fulfil clients’ orders during the period. This is reflected in our projected 19.4% year-on-year decline in its financial year ending June 30, 2017 (FY17) forecast net profit.

Overall, the net impact of this development is within expectations. Hence, we are not making any changes to our “reduce” call or earnings estimates. Our sum-of-parts-based TP is also unchanged at 30 sen, based on an unchanged price-earnings multiple of 13.3 times (10% discount to five-year historical mean).

We remain concerned about the reputational impact of the suspension as well as lower demand for its products. Key risks to our view are a sharp increase in sales volumes and faster-than-expected delivery of expansion plans. — CIMB Research, March 6