Hovid Bhd
(March 27, RM0.435)
Maintain hold call while lowered target price (TP) to 43 sen. While we continue to like its earnings growth prospects, we believe this has been priced in following the 24% surge in its share price since the beginning of the year. 

We would turn more positive if the company achieves stronger-than-expected sales growth and profit margin.

We recently hosted a meeting with Hovid’s chief financial officer, Andrew Goh, and seven analysts and fund managers. There were no major surprises from the meeting apart from the slightly higher-than-expected depreciation charges of the new plant.  Other key takeaways were the first phase of its new tablet and the capsule plant is on track to commence operations by mid-2015, it may take 4-5 months to ramp up production, and the second phase of the same plant is expected to start up by early-2016. 

The first phase will raise its existing capacity by 30% while the second phase will raise capacity by 70%. 

Although the new plant may have excess capacity in the near term, Hovid plans to increase its tender business to fill up the idle capacity. Tablet and capsule products account for roughly 60% of Hovid’s revenue. 

In the past few years, capacity constraints have been one of the key factors holding back Hovid’s revenue growth.  With the completion of the new plant, Hovid should return to a stronger growth path. 

Although the new plant may create excess capacity in the near term, we believe it will not affect Hovid’s profit margin significantly as its manufacturing expenses consist mainly of variable components. 

We understand the new plant will have greater operating efficiency. 

Hovid’s plan to participate more aggressively in tenders should help to improve the company’s overall profit margin. — CIMB Research, March 27

This article first appeared in The Edge Financial Daily, on March 30, 2015.