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Friday, March 7, 2014

HOVID - Hale and hearty after 2Q bug (CIMB)

Target Price: 0.43
We hosted a small group investor meeting with Hovid’s CFO, Mr. Andrew Goh last Tuesday. The key takeaways are 1) the slow revenue growth in 2Q was due to unscheduled downtime of two weeks for its high-volume blister packaging machine, which delayed the production of about RM4m worth of drugs, 2) it raised its wages in Sep last year but only started to pass through the higher cost to its customers this year, and 3) it remains confident of maintaining 10-15% revenue and earnings growth annually.
What We Think
We are cutting our FY14 EPS by 6% to account for the lost production due to outage of its blister packaging machine in 2Q. However, we continue to anticipate stronger earnings in 2H as the machine has been restored. The products that were supposed to be delivered in 2Q were shipped out in Jan 14. We also expect better profit margins in 2H as higher production will lower its unit production cost. On top of that, Hovid typically revises its selling prices in 2H to account for operating cost inflation. Higher selling prices should further boost its profit margin. Higher electricity tariffs from the start of this year will have minimal impact on Hovid’s earnings as electricity accounts for only 2-3% of its total operating cost. Overall, we expect earnings in 2H to be stronger.

What You Should Do
Hovid's recent share price weakness provides a good opportunity for investors to accumulate the stock, in our view. We continue to like its strong earnings growth prospects stemming from fast-growing pharmaceutical spending in its key markets. Potential re-rating catalysts are stronger 2H earnings and increased product registrations in its export markets.

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