Synergy likely for Bioalpha in North West Enterprise stake buy

This article first appeared in The Edge Financial Daily, on October 4, 2018.
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Bioalpha Holdings Bhd
(Oct 3, 24 sen)
Maintain add with an unchanged target price (TP) of 44 sen:
On Monday evening, Bioalpha Holdings Bhd proposed to issue new shares totalling not more than 10% of its issued share base. Based on its existing issued share base of 810 million and assuming a 25 sen placement price, the company could raise RM20.2 million cash. We believe funds from the new share placement will be mainly used to acquire North West Enterprise Sdn Bhd (NWE).

 
In the same evening, Bioalpha announced that it has signed a memorandum of understanding to acquire a majority stake in NWE. NWE is involved in the manufacture, trading and supply of hotel amenities, personal care products and instant beverages in sachets for hotels and other establishments in the hospitality industry, and it has a track record of more than 30 years.

NWE’s customers include major hotels such as Shangri-La, Resorts World, Berjaya Hotels, Eastin Hotels, Sunway Resort Hotel & Spa, Hard Rock Hotels, Pullman Hotel & Resorts, Hotel Equatorial, Mahkota Hotel Melaka and the Nexus Resorts & Spa.

Bioalpha has not finalised the purchase price for a stake in NWE. We believe there is synergy in acquiring a stake in the NWE business as it offers a distribution channel to hotels all across the country. The company could distribute its local tea products such as tongkat ali tea, kacip fatimah tea and bumi hempedu tea to tourists staying in the hotels.

There are no details yet on the profitability of NWE but, in the worst case of zero profit from NWE, the potential dilution to financial year 2019 forecast (FY19F) to FY20F earnings per share (EPS) is around 6%. Our target price would fall from 44 sen to 41 sen, assuming no EPS enhancement from the NWE acquisition, which is unlikely due to the potential anticipated synergies from buying NWE.

Until more financial details on NWE are available, we maintain our EPS forecasts and target price, based on an unchanged 20 times 2019 forecast price-earnings ratio (PER), a 20% discount to our consumer target PER for 2019 forecast of 25 times. The stock remains an “add”. Potential catalysts include strong sustained domestic revenue growth and potential profit growth from the NWE acquisition while downside risks include export revenues remaining weak. — CGSCIMB Research, Oct 2