Warrants Update: Hovid-WB to ride company's growth plans

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This article first appeared in The Edge Malaysia Weekly, on July 4 - 10, 2016.

HOVID Bhd’s warrant, Hovid-WB, looks set to benefit from the growth plans of the Ipoh-based pharmaceutical company.

The Edge Financial Daily reported on June 27 that Hovid is in expansion mode, investing up to RM60 million in setting up a new R&D centre in Bayan Lepas, Penang, and a pharma plant in Chemor, Perak.

Hovid chairman and managing director David Ho Sue San was quoted as saying that the group expects to reap the fruits of its investments by its financial year ending June 30, 2018 (FY2018).

Hovid-WB carries a strike price of 18 sen and a one-for-one conversion ratio. The five-year warrant, which expires on June 5, 2018, was issued under a one-for-two renounce­able rights issue of warrants at two sen each in May 2013.

Hovid-WB has been trending lower over the last 12 months, down from its 52-week peak of 31.5 sen recorded on July 24 last year. Year to date, the warrant has fallen 30% and closed at 19.5 sen last Tuesday.

It is trading at a 2.6% discount to the underlying share, which closed at 38.5 sen last Tuesday. At zero premium, Hovid-WB would theoretically be worth 20.5 sen, which is 5.1% higher than its closing price on Tuesday.

A quick check on Bloomberg shows that Hovid has a consensus target price of 37 sen, giving it a 3.9% downside potential. At the moment, two of the three research houses that cover Hovid, namely CIMB Research and RHB Research Institute, have a “sell” recommendation on it.

BIMB Securities Research is the only one that recommends a “hold” and has a target price of 42 sen based on a FY2016 price-earnings ratio of 15 times. This means that at zero premium, Hovid-WB would theoretically be worth 24 sen if the underlying share hits the target price, presenting an upside of 23.1%.

In a May 25 report, BIMB Securities Research reduced its FY2016 and FY2017 net earnings forecasts to RM17 million (-20%) and RM23.1 million (-13%) respectively as a result of higher operating expenses due to higher cost of imported raw materials.

For its nine months ended March 31, 2016, Hovid saw its net profit fall 28.8% year on year to RM11.68 million. No dividend has been declared for the third quarter.