This article first appeared in The Edge Financial Daily on September 12, 2017

Bioalpha Holdings Bhd
(Sept 11, 26 sen)
Maintain add with a target price (TP) of 37 sen: Last Wednesday, ACE Market-listed Bioalpha Holdings Bhd held its first site visit for investors at its Pasir Raja Herbal Park. Some 30 analysts and fund managers turned up and were hosted by Bioalpha managing director Wiliam Hon and his senior management team.

So far, 124 acres (50.12ha) of the 1,004 acre park have been cleared and the remaining 880 acres are due to be cleared by end-2018. The planned capital expenditure is RM5 million over 18 months.

We expect marginal revenue from the Pasir Raja Herbal Park this year but it could be significant from 2020. We have not assumed any potential earnings from it yet.

The Pasir Raja Herbal Park is about a two-hour drive from the Kuala Terengganu Sultan Mahmud Airport. The company also has another 295 acres of herbal park in Kota Tinggi, Johor.

In 2014, Bioalpha was appointed by the East Coast Economic Region Development Council (ECERDC) as the anchor company to develop the Pasir Raja Herbal Park land into an integrated herbal cluster and manage it.

Bioalpha expects the park to help the company source its own herbs and improve its quality control. The 124-acre tract that had been cleared has been planted with various herbs and fruit trees such as the Kacip Fatimah, Tongkat Ali, Roselle, ginger, lemongrass, papaya, coconut and black pepper.

While it may only take a year for a papaya tree to mature, it takes five to seven years for coconut trees and Tongkat Ali plants to do so. We estimate the current average selling price of raw materials from the park is around RM3 per kg and we expect it to gradually rise as the plantation matures over the next few years.

Bioalpha is targeting a production of only 200 tonnes of raw materials from the park this year.

Assuming the average selling price is RM3 per kg, we estimate revenue from the park this year would be only about RM600,000 and a profit before tax (PBT) of RM300,000 (assuming a 50% PBT margin). However, by 2020, production from the park could rise to 2,000 tonnes per annum and assuming the average selling price is RM3 per kg, we project a revenue of RM6 million and PBT of RM3 million (assuming a 50% PBT margin).

We have not assumed any earnings from the park in our earnings forecasts. Bioalpha currently sources its Tongkat Ali root from the orang asli, who collect the root from the jungles. We estimate Bioalpha would start sourcing its Tongkat Ali root internally from 2020.

We understand there could soon be an industry shortage of Tongkat Ali as distributors from China have been purchasing it in large quantities over the past few years. This could be positive for herbal planters like Bioalpha in the long-term.

We maintain our earnings per share forecasts and TP of RM0.37, based on 20 times financial year 2018 price-earnings ratio (PER) at a 20% discount to our 25 times calender year 2018 target PER for the consumer sector.

The discount reflects Bioalpha’s small market capitalisation. The stock remains an “add” call and potential catalysts include stronger-than-expected sales from China and India, its two main export markets. A downside risk is weak domestic sales. — CIMB Research, Sept 10