PETALING JAYA: Nova Wellness Group Bhd
is well positioned to ride on the demand for healthcare supplements moving forward, says Kenanga Research.
The group develops, produces and sells supplements and skincare products under its house brands and also serves the original equipment manufacturing segment.
According to Kenanga Research, Nova Wellness is guided for 15% to 18% volume growth, which is consistent with its 2023 assumption of 17%.
having chalked up an average volume growth rate of 16% to 18% in the financial year 2020 (FY2020) to FY2022.
The research house, which came away feeling reassured from a recent meeting with Nova Wellness, said: “There has been a surge in demand for health supplement products as consumers take precautionary steps amid rising cases of the common flu and influenza-like illnesses.”
Kenanga Research also said it was unperturbed by the group’s recurring amortisation to the tune of RM1mil to RM2mil per annum, arising from the development of new products, which is expected to be offset by its incremental revenue.
“Typically, impairment of intangible assets (non-cash items) relates to impairment of research and development products, which is capitalised in the balance sheet.
“Once the product is commercialised, the R&D costs related to the products are amortised on a straight-line basis based on expected product life span between five and 10 years.
“It is recurring as long as the R&D project for new products continues,” added the research house. Looking ahead in FY23, Kenanga Research expects the group’s earnings before interest, taxes, depreciation and amortisation (EBITDA) margins to revert back to between 46%-48% compared to 45% in FY22 following the absence of start-up cost incurred from commercial production of its new plant.
Due to better economies of scale and efficiency coupled with incremental revenue, it noted the new plant is expected to have better overhead absorption and hence margin improvements.
Kenanga Research also said the group has raised average selling prices (ASPs) by 4%-5% over the past six months across a range of products to fully pass on higher costs arising from the weakness in ringgit. Its raw and packaging materials purchased are denominated in Chinese yuan and the US dollar.
“We believe this is a reflection of the low price elasticity of demand of the industry.
“This key input accounts for an estimated 30% of total cost.
“We have factored ASP to increase by 2% in our forecasted FY23 earnings,” the research house pointed out.
Kenanga Research said it liked Nova Wellness for its integrated business model, superior margins due to its original brand manufacturer business model and earnings growth driven by capacity expansion, a widening distribution network and penetration into local public hospitals.
For these reasons, the research house has an “outperform” call on the stock with a target price of RM1.09.
However, the risks to its forecasts include intense competition from existing/new and local/foreign players, weak ringgit resulting in high cost of imported inputs and product safety and regulatory risks.
