This article first appeared in Capital, The Edge Malaysia Weekly, on March 21 - 27, 2016.

DESPITE easing 20% from its 52-week high of 55 sen last April, Hovid Bhd’s valuation is still deemed pricey compared with that of its pharmaceutical peers.

As at last Wednesday’s close of 43.5 sen, Hovid was trading at 16.05 times historical earnings, higher than 13.34 times for Apex Healthcare Bhd, for example. And though Pharmaniaga Bhd was trading at 17.26 times earnings, it had a higher dividend yield of 5.36% compared with Hovid’s 2.3%.

According to an analyst tracking Hovid, its earnings had been affected by lower margins as a result of higher production costs. At RM10.2 million, earnings in the six months ended Dec 31, 2015 (1HFY2016), were flat year on year. Operating profit margin slipped to 17.3% from 17.8% in the previous corresponding period.

“There is concern over whether this compression of margin will continue in the second half (of the financial year ending June 30, 2016) because the company hired more people and did more marketing promotions to lock in customers as its production capacity increased,” says the analyst.

On Feb 16, CIMB Research analyst Saw Xiao Jun cut Hovid’s earnings per share (EPS) for FY2016 by 4% due to higher operating expenses and foreign exchange loss. Saw, however, maintained Hovid’s EPS for FY2017 and FY2018.

While CIMB’s target price for Hovid is 48 sen, RHB Research values the stock at 45 sen and BIMB Securities at 50 sen. All three research houses have a “hold” call on the stock, according to Bloomberg data at the time of writing. Analysts covering Apex and Pharmaniaga have a “neutral” recommendation.

Hovid’s valuation notwithstanding, there is growth potential in its business of manufacturing generic pharmaceutical products. In his report, CIMB’s Saw says Hovid’s 30% additional capacity can be utilised within 6 to 12 months as its order book always exceeds its production capacity.

Thus, investors who want to ride Hovid’s bright prospects could look at its warrants. Closing at 26 sen last Wednesday, Hovid-WB was at a 1.15% premium to the underlying share. The warrant has a one-for-one conversion ratio, an 18 sen strike price and expires on June 5, 2018.

If the consensus target price of 48 sen is reached and assuming zero premium to the underlying share, Hovid-WB should fetch 30 sen. This would give investors a 15.4% upside potential for Hovid-WB compared with 10.3% for the mother share at current levels.

Hovid’s 52-week high of 54.4 sen was recorded on April 21, 2015, while it hit its 52-week low of 40.2 sen on March 18, 2015. 

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