Hovid a stand­out among small takeover tar­gets

The Star Malaysia - StarBiz - - Com­pa­nies & Strate­gies - By S. PUS­PADEVI puspa@thes­tar.com.my

JOIN­ING the list of re­cent takeover at­tempts of small listed com­pa­nies, Main Mar­ket-listed phar­ma­ceu­ti­cal com­pany Hovid Bhd stands out, although for the rather high con­di­tion its of­fer­ors have im­posed.

Ma­jor share­holder David Ho Sue San, work­ing with pri­vate eq­uity (PE) firm TAEL Two Part­ners Ltd, have made a gen­eral of­fer for Hovid shares at 38 sen apiece in a bid to take the com­pany pri­vate.

The ex­er­cise sees a spe­cial ve­hi­cle called Fa­jar As­to­ria Sdn Bhd, set up by TAEL to un­der­take the of­fer with Ho. TAEL is part of the TAEL Part­ners group, es­tab­lished in 2007 as a South East Asian-cen­tric PE firm.

The takeover of­fer will also in­volve Ho and Fa­jar As­to­ria buy­ing up the group’s out­stand­ing five-year war­rants at 20 sen per war­rant.

Based on Hovid’s an­nounce­ment on Mon­day, Ho, who is also the chair­man and manag­ing di­rec­tor, holds a 33.72% stake or 276.80 mil­lion shares and 43.57% or 140.39 mil­lion war­rants in Hovid.

The of­fer­ors are propos­ing to buy 181.84 mil­lion units of the out­stand­ing war­rants, which rep­re­sents about 56.43% of the to­tal war­rants.

The war­rants ex­pire on June 5, 2018 and have an ex­er­cise price of RM0.18 per war­rant.

Go­ing back to the buy­out of­fer, the con­di­tion of 90% ac­cep­tances means this: Ho will need ac­cep­tances of 90% of the 66.28% of Hovid shares he does not own.

This trans­lates into a to­tal of 59% hold­ing of the com­pany (which works to around 484 mil- lion Hovid shares) ac­cept­ing Ho’s of­fer.

Hence the takeover of­fer will fail, if Ho does not achieve this level of ac­cep­tances. How­ever, it is in­ter­est­ing to note that the of­fer­ors have also stated that they re­serve the right to review the level of ac­cep­tance to less than the 90% level. It will be in­ter­est­ing to see if they lower the con­di­tion at some point dur­ing the life of the of­fer.

Ho, a pharmacy grad­u­ate, is also the founder of Hovid.

He in­vented the Fast Dis­solv­ing Dosage Form tablet tech­nol­ogy with his team when he was with phar­ma­ceu­ti­cal firm Wyeth Lab­o­ra­to­ries Ltd in the late 1970s. This was Wyeth’s first patent in such tech­nol­ogy.

Apart from his phar­ma­ceu­ti­cal back­ground, he had an en­trepreneur­ship streak in him as well after he took over his fa­ther’s herbal tea busi­ness. The busi­ness flour­ished un­til he bought over a build­ing in Ipoh and named it Ho Yan Hor Med­i­cal Hall. This was later re­named as Ho Yan Hor Sdn Bhd and to­day it is known as Hovid Bhd.

Aside from generic drugs and di­etary sup­ple­ments un­der its own Hovid brand­name, the com­pany also does con­tract man­u­fac­tur­ing for other drug­mak­ers. About 95% of its rev­enue is said to be de­rived from the Hovid brand name.

He later founded another com­pany called Carotech Bhd, which went pub­lic on Bursa Malaysia’s Mes­daq mar­ket, now known as ACE Mar­ket, in 2005.

The Ipoh-based Carotech spe­cialised in ex­tract­ing to­cotrienol (vi­ta­min E) from crude palm oil and be­came well-known glob­ally, con­quer­ing about 80% of global palm vi­ta­men E mar­ket share. But Carotech’s for­tunes dwin­dled and was delisted on May 11, 2012 for fail­ing to sub­mit its reg­u­lar­i­sa­tion plan to Bursa Se­cu­ri­ties for ap­proval within the stip­u­lated time.

A se­ries of events took place after this where Ho and other di­rec­tors at Carotech and Hovid were pub­licly rep­ri­manded by the author­i­ties for breach­ing list­ing re­quire­ments with re­gard to both com­pa­nies’ fi­nan­cial re­sults.

So why does Ho want to pri­va­tise Hovid? The of­fer­ors did not in­di­cate the ra­tio­nale for the pri­vati­sa­tion.

Nev­er­the­less, it is per­ti­nent to note that Hovid had slipped into the red in fi­nan­cial year ended June 30, 2017 (FY17).

The com­pany posted a net loss of RM1.53mil from net profit of RM17.9mil, against a 10% drop in rev­enue at RM169.94mil from RM189.03mil.

It has RM15.9mil in cash, with debt of RM65.6mil as at June 30, 2017.

The earn­ings, ac­cord­ing to Hovid, was dragged by the dis­rup­tion in man­u­fac­tur­ing ac­tiv­i­ties aris­ing from the re­vo­ca­tion of its man­u­fac­tur­ing li­cences of two plants. This sub­se­quently af­fected its sales vol­ume and led to higher op­er­at­ing costs from im­prove­ments on qual­ity sys­tems and pro­duc­tion pro­cesses.

Hovid’s man­u­fac­tur­ing li­cences of two plants were re­voked after an au­dit by the Na­tional Phar­ma­ceu­ti­cal Reg­u­la­tory Agency (NPRA) re­vealed that its Phar­ma­ceu­ti­cal Qual­ity System were not in com­pli­ance with the lat­est Good Man­u­fac­tur­ing Prac­tice.

The re­vo­ca­tion of li­cence was linked to Hovid re­call­ing its hy­per­ten­sion pills, Ter­nolol 50mg on Jan 5, which trig­gered the au­dit by the NPRA.

Hovid’s earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­sa­tion (Ebitda) mar­gin also suf­fered for the fourth quar­ter FY17, shrink­ing to a mere 4.2%, from fourth quar­ter of FY16’s 13.5%.

The com­pany man­aged to ob­tain the li­cense for its Che­mor plant in May, but the other plant re­quires some phys­i­cal changes, ac­cord­ing to reports.

At the cur­rent share price of 36 sen, just two sen short of the of­fer price, Hovid is trad­ing at a for­ward price-to-earn­ings ra­tio of 21.18 times.

Hovid’s 52-week high of 38 sen was about a year ago on Oct 14, 2016, while its 52-week low was on Jan 10, 2017 at 24 sen. How­ever, its high­est was last seen on April 21, 2015 at 53.7 sen. The stock has risen 16.13% from Oct 3rd’s 31 sen, be­fore Hovid’s pri­vati­sa­tion an­nounce­ment. In terms of as­sets, Hovid has about 16 prop­er­ties and land worth some RM33mil, with the bulk last val­ued in June 2016.

Of these, the ones val­ued the most in­clude its Che­mor plant and re­search and devel­op­ment cen­tre worth RM27.15mil, a RM13.22mil phar­ma­ceu­ti­cal fac­tory and of­fice build­ing in Ipoh and seven parcels of va­cant land also in Ipoh worth RM11.5mil.

A month ago, CIMB Re­search main­tained its “hold” rat­ing on the stock, with a higher sum-of­parts based tar­get price of 34 sen. The house cut its FY18-19 es­ti­mates by 16.3%-27.6% to ac­count for lower pro­duc­tion vol­ume and fur­ther de­lays in the Che­mor plant ex­ten­sion. The re­search house said Hovid was fac­ing labour short­ages that re­sulted in its less than op­ti­mal pro­duc­tion vol­ume.

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