Translate This Page

Wednesday, December 4, 2013

HOVID - Our drug of choice (CIMB)

We like Hovid, Malaysia’s largest pharmaceutical exporter, for its earnings growth potential, resilient earnings and efforts to register Tocovid SupraBio as a drug. If successful, Tocovid could generate billions of dollars in annual sales.

We begin coverage on the stock with an Outperform call and a target price of RM0.43, based on SOP valuation. Re-rating catalysts could come from increased product registrations in its export markets and strong earnings growth.

From herbs to drugs

Hovid started off as a herbal tea maker in 1941 and began producing generic drugs in the 1980s. It prides itself on having the largest export sales among Malaysia-listed pharma
companies, deriving half of its revenue (53% in FY13) from exports. It also has a strong R&D culture, judging from its long list of accolades in manufacturing innovations. These positives are no longer eclipsed by its loss-making subsidiary, Carotech, which it disposed of in 2011.

Strong organic growth

Hovid's key markets offer solid growth opportunities. Healthcare spending in Malaysia and some of its key export markets, such as Nigeria, Cambodia and Myanmar, is low by international standards. Rising affluence and improved access to healthcare services will fuel demand for drugs. Increased product registrations will also boost Hovid's future earnings by opening up new markets for the group as more drugs will be allowed for sale in countries where the drugs were previously unapproved. On top of that, Hovid is seeking approval from the US FDA to sell Tocovid SupraBio (a type of Vitamin E) as a drug that could reduce brain damage caused by strokes. If successful, it could open up a blue ocean that is worth billions of dollars in annual sales.

A defensive growth stock

Hovid's earnings are defensive, as attested by its consistent EBITDA (ex-Carotech) growth during the global financial crisis in 2007-2009. Our valuation of RM0.43 per share does not include the value of Tocovid SupraBio as a potential drug as its approval could take at least another 3-5 years. Even without it, we believe that Hovid looks attractive given its strong growth potential.

No comments: