Hovid likely to offset capacity loss
CIMB Research: Chemor plant resumption good news
PETALING JAYA: Although Hovid Bhd’s Ipoh plant is still suspended from operations, the resumption of production at its Chemor plant bodes well for the Perak-based healthcare and pharmaceutical company, which had the manufacturing licences of both the plants revoked in January.
The Chemor plant, which accounts for the bulk of Hovid’s total capacity, would be able to offset the impact of the continued suspension of the Ipoh plant.
According to CIMB Research, the reissuance of the manufacturing licence for Hovid’s Chemor plant, after two months of suspension, would enable the company to increase working shifts to offset any capacity loss beyond the original estimate of only a 60-day hiatus for its Ipoh plant.
“Although the delay in the reissuance of the manufacturing licence for the Ipoh plant is slightly negative, we still view this net development as an overall positive,” CIMB Research said.
“This is due to the fact that Hovid’s Chemor plant contributes 70% of its total capacity. Hence, the group will be able to increase working shifts to offset any capacity loss beyond the original estimate of only a 60-day hiatus for its Ipoh Plant. We view this as in line with our overall expectations,” the brokerage said in its report.
CIMB Research, however, has maintained its “reduce” recommendation on Hovid, with an unchanged target price of 30 sen, citing “reputational impact” as the key concern.
“We remain concerned about the reputational impact of the suspension as well as lower demand for its products,” CIMB Research explained.
The brokerage said it would not make any changes to its earnings estimates for Hovid, and that it would continue to value the counter at an unchanged price-earnings multiple of 13.3 times, which represents a 10% discount to the fiveyear historical mean.
Hovid’s shares closed 2.5 sen or 8% higher at 34 sen yesterday, off an intra-day high of 35.5 sen.
The company had on Monday obtained permission to restart production at its Chemor plant after having the manufacturing licence for the particular plant reinstated by the National Pharmaceutical Control Bureau of the Health Ministry.
The manufacturing licence for its Ipoh plant, however, remained suspended pending the completion of corrective actions which are already in progress.
To recap, Hovid’s manufacturing licences for both its Chemor and Ipoh plants were suspended on Jan 9, 2017, after an audit by the National Pharmaceutical Regulatory Agency (NPRA) found both plants were non-compliant with the Current Good Manufacturing Practice (CGMP).
Hovid said in filings with Bursa Malaysia that it aimed to complete the necessary corrective actions at the Ipoh plant to comply with the CGMP as required by the NPRA by the end of this month.
It pointed out that the manufacturing licence for the Ipoh plant would likely be reinstated by the end of May.
Hovid had earlier noted that the revocation of its two manufacturing licences would affect about 4.63 sen of its turnover per share, based on its audited results for the financial year ended June 30, 2016 (FY16).
On that note, CIMB Research expected Hovid to register weak results for the third quarter ending March 31, 2017.
“This is due to the two-month manufacturing hiatus for the Chemor plant, as well as negligible revenue contribution from the Ipoh plant during the period.
“Although existing inventories were allowed to be marketed, we doubt they were sufficient to offset the negative impact of the loss of production and the inability to fulfil clients’ orders during the period,” it said.
CIMB Research has forecast a 19.4% year-on-year (y-o-y) decline in Hovid’s net profit for FY17.
Hovid registered a net profit of RM17.9mil (down 14.4% y-o-y) on a revenue of RM189mil (up a marginal 0.3% y-o-y) for FY16.