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Wednesday, July 16, 2014

Hovid eyeing Middle East markets for its products (Edge)

Initiating coverage with buy rating and target price of 46 sen: Hovid is a generic drug manufacturer based in Ipoh, Perak and it produces more than 400 kinds of drugs. Its revenue grew at a compound annual growth rate (CAGR) of 11.8% between 2009 and 2013 while its export sales contributed 52.5%, or RM90.5 million, to its financial year 2013 ended June 30 (FY13) top line.

Hovid is currently looking to export to emerging markets and the Middle East, which it has yet to tap. We estimate that its export contributions may increase to 56.0% in FY16 should this expansion prove successful.

Hovid is set for a good FY15 ahead, given abundant opportunities in both the domestic and global pharmaceutical markets. We anticipate that its net profit may grow at a CAGR of 18.5% in FY14 to FY16, or RM20.7 million to RM32.7 million, on the back of growing affluence, health awareness and healthcare expenditure in the markets in which it operates. It also stands to benefit from the “patent cliff”, a wider export reach and capacity expansion going forward.

Frost & Sullivan sees local healthcare expenditure growing at an annual rate of 6.5% in 2012 to 2018 to RM68.4 billion. Private health expenditure, specifically, is slated to grow at a CAGR of 16.5% in 2010-2020. It is also expected to generate revenue of RM13.8 billion in 2015 (2011: RM7.5 billion).

In addition, the research house sees the expansion of healthcare services nationwide by both public and private hospitals, translating into increasing demand for generic drugs.

We value Hovid at 46 sen by ascribing 17 times fully-diluted calendar year 2015 earnings per share, at a discount to the 18.9 times multiple of its global peers and offering a 14% upside from its current price.

We like Hovid for its: (i) robust revenue pipeline; (ii) strong and wide exposure to the export market; and (iii) decent return on equity of 12% to 13% in FY14 and FY15.  — RHB Research, July 14

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