CIMB Research upbeat on Hovid, target price 43 sen

KUALA LUMPUR: CIMB Equities Research thinks investors may have overlooked the potential of Hovid’s pharmaceutical business and efforts to register tocotrienols (a type of Vitamin E) as a US FDA-approved drug.

It said on Monday these positives also appear to be eclipsed by losses at its Carotech subsidiary over the past few years. FY6/13 net profit was the best since FY07 while revenue ex-Carotech hit a record high.

“Hovid is well positioned to tap the growing healthcare spending in Malaysia and other emerging economies. This, plus its defensive earnings, suggests that Hovid should be worth 43 sen conservatively, based on 16.5 times CY15 P/E, a 10% discount to the healthcare sector’s one-year average forward P/E. This suggests 39% share price upside,” it said. Its last traded price was 31 sen.

CIMB Research said Hovid started off as a herbal tea maker in 1941 and began producing generic drugs in the 1980s.

Hovid prides itself on having the largest export sales among Malaysia-listed pharma companies, deriving half of its revenue (53% in FY13) from exports. The company also has a strong R&D culture, judging from its long list of accolades in manufacturing innovations.

Hovid is the only Malaysia-listed pharma company that holds patents.

“The next five years will be an exciting period for generic drug makers as drug patents worth US$133bil in annual sales will expire. This allows Hovid to launch the generic versions of these drugs and expand its sales.

“Growing healthcare spending in its key markets – Malaysia and other lower-middle income economies – also offers solid growth opportunities. Healthcare bills in these countries are low by international standards, and rising affluence and improved access to healthcare services will fuel greater demand for drugs,” said the research house.

CIMB Research also said Hovid is seeking US FDA's approval to sell tocotrienols 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.

“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 43 sen per share does not include the value of tocotrienols as a potential drug as its approval could take at least another three to five years. Even without it, we believe that Hovid looks attractive given its strong earnings growth,” said the research house.