Bioalpha Holdings Bhd
(Oct 31, 24 sen)
Maintain add with a target price (TP) of 52 sen: Bursa Malaysia has approved Bioalpha Holdings Bhd’s proposed 1:4 rights issue, which also comes with one free warrant for every rights share subscribed. Up to 133.3 million new rights shares and 133.3 million new warrants will be issued.

Bioalpha’s issued share base is expected to rise from 666.7 million shares currently to 800 million shares post the rights issue. Assuming full warrant conversion, issued shares will rise to 933.3 million shares. 

The next step for the company is to seek shareholders’ approval for the proposed rights and warrants issue at an extraordinary general meeting (EGM), set on Nov 15 of this year.

There will be no underwriters for the proposed rights issue as both major shareholders, William Hon (who is also the managing director of the company) and Perbadanan Nasional Bhd (PNS), have announced that they will subscribe to up to 72.7% (equivalent to 97.3 million new rights shares) of the new rights shares issued that are not taken up by minority shareholders. 

Assuming the rights price is set at 21 sen per share, the proposed rights issue will raise RM28 million in gross proceeds for the company. Management says the funds will be used mainly to fund working capital for 27 new product launches (in China, Indonesia and Malaysia) as well as organic herb planting activities for its Phase 2, comprising 880 acres (356.12ha) of land in Pasir Raja.

By the end of Phase 2, more than 100 types of herbs will have been planted by the company. Indonesia is Bioalpha’s main market, contributing close to half of group revenue in 2015. 

Revenue growth in this country could be faster if not for the federal government’s sluggish approval process. It usually takes a slow two to three years for product approval but all this will change as Bioalpha set up a new plant in Pekan in end-September. 

Product approval can now come from the local council, shortening the process to three to six months. In 2017, Bioalpha targets to launch 12 new products. Bioalpha’s share price is down 15% after the proposed rights issue announcement on Sept 7. 

Weakness in the share price offers an opportunity to accumulate the stock at current levels. 2017 stock valuation (pre-rights issue) is only 10 times price-earnings ratio (PER), which we consider to be cheap, for a high earnings growth stock. 

We maintain our earnings per share forecasts and TP, based on a 20% discount to our 2017 consumer sector target PER of 25 times; the discount reflects its small market cap.

Rerating catalysts for the stock are strong sales from China and Indonesia on the back of new product launches. Downside risks are domestic sales remaining weak. — CIMB Research, Oct 30