CIMB Research retains Reduce call on Hovid


KUALA LUMPUR: CIMB Equities Research is retaining its Reduce call on Hovid and sum-of-parts based target price of 30 sen after the manufacturing licence for the Chemor plant was reissued on Monday.

It said on Tuesday this was in line with its expectations of a two-month hiatus for the plant.

“Overall, the net impact of this development is within expectations. Hence, we are not making any changes to our Reduce call or earnings estimates,” it said, adding the target price was also based on an unchanged price-to-earnings multiple of 13.3 times (10% discount to five-year historical mean). 

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

Meanwhile, Hovid’s Ipoh plant’s operations are still suspended given the more complexity of changes required. Hovid aims to obtain the licence by end-May of 2017.

Commenting on the Chemor plant, the research house said the facility contributes 70% of total capacity and increased production from this plant will offset the delay in Ipoh plant.

To recap, Hovid’s manufacturing licences for both its plants were suspended from Jan 9 after the National Pharmaceutical Control Bureau audit found that both plants were non-compliant with the Current Good Manufacturing Practice (CGMP).

On Monday, Hovid announced the bureau had reissued the manufacturing licence for its Chemor Plant. The plant will resume operations on Tuesday.

As for the Ipoh plant, Hovid is executing the necessary changes and aims to obtain the licence by end-May 17, upon the satisfaction of the bureau.

“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 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 it was sufficient to offset the negative impact of the loss of production and the inability to fulfill clients’ orders during the period. This is reflected in our projected 19.4% on-year decline in FY17F net profit,” it said.

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