Warrants Update: Hovid-WB may ride pharmaceutical M&A wave

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DRUG-MAKER Hovid Bhd recently saw its share price rise alongside local pharmaceutical peers on speculation that it is a potential beneficiary of a proposal for doctors to leave the dispensing of drugs to pharmacists. 

With half of its sales coming from US-dollar-denominated exports, Hovid is also a beneficiary of the ringgit’s weakness against the greenback. Net profit for its second quarter (2Q)ended Dec 31, 2014, jumped 26% year on year to RM4.6 million on the back of 8.4% y-o-y revenue growth to RM48.1 million.

Sentiment on the counter may have also been buoyed by a marked rise in mergers and acquisitions (M&As) worldwide. “We expect 2015 to be a year of robust and highly competitive M&A activity in the biopharma industry, marked by a continued rise in deal premiums,” Ernst & Young says in a recent report.

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At a high of 44.5 sen on March 10, Hovid’s (fundamental: 2.1; valuation: 1.2) shares had gained 29% this year, before retreating to 41 sen last Wednesday. For most of last year, the stock traded between 33 sen and 40 sen. It did, however, close as high as 45.9 sen on July 30 last year.

Its warrants, Hovid-WB, which closed at a high of 29.5 sen on Feb 23, had gained as much as 51.3% year to date, before retreating to 22 sen last Wednesday. That is still 12.8% above the 19.5 sen it ended at last year.

Hovid-WB has an 18-sen strike price and one-to-one conversion ratio. It expires on June 5, 2018. 

At last Wednesday’s close of 22 sen, Hovid-WB was trading at a 2.44% discount to the mother share. For the past week, the warrants were trading at a discount to the underlying securities — something that last happened over a year ago.

Nonetheless, CIMB Research, which recently downgraded Hovid to “hold” from “add”, believes that at 45 sen, the market has priced in earnings improvement from the US dollar’s strength against the ringgit. In a Feb 25 note, it says it has raised 2015 to 2017 earnings forecast by 4% to 7% to account for higher sales and a weaker ringgit.

RHB Research also has a target price of 45 sen on Hovid, with a “neutral” call. This implies a mere 9.8% upside potential from last Wednesday’s close. Assuming zero premium to the underlying stock, Hovid-WB could rise 22.7% to 27 sen if Hovid goes up to 45 sen.

That said, Hovid expects its prospects to be “satisfactory as the group is actively securing new overseas markets and registrations of new products”, according to its 2Q notes.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on 23 March, 2015.