Hovid posts loss for financial year 2017
Revocation of manufacturing licences weighs on pharmaceutical firm
PETALING JAYA: Hovid Bhd posted a core net loss of RM300,000 for the financial year ended June 30, 2017, missing CIMB Equities Research and Bloomberg consensus expectations of a core net profit due to the revocation of the manufacturing licences of two plants earlier this year.
The research house said the pharmaceutical company’s fourth quarter ended June (Q4FY17) revenue fell 12.9% on-quarter to RM35.6mil as the revocation led to manufacturing losses and lower sales volume.
CIMB Research cut its FY18-19 estimates by 16.3%-27.6% to account for labour shortages as well as the delay in the Chemor plant extension.
“Maintain hold, with a higher sum-of-parts based target price of 34 sen as we roll over to CY19F EPS,” it said in a report.
CIMB Research said Hovid’s Q4FY6/17 revenue fell by 12.9% on-quarter owing to lower tender sales and insufficient inventories to replenish sold products.
This was due to the suspension of manufacturing licences for its two production facilities from Q3FY17 to mid-Q4FY17. Also, operations were unable to run optimally upon the re-issuance of its licences due to a shortage of labour.
“As a result, the Q4FY17 earnings before interest, tax, depreciation and amortisation (Ebitda) margin fell a net 11.8 percentage points on-quarter to minus 11% while the bottom line plunged by more than 100% on-quarter to a core net loss of RM5.5mil.
While FY17 revenue declined by 10.1% on-year, the bottom line slid by more than 100% on-year into losses of RM300,000.
This was due to lower sales volume and higher operating costs, including renovation works and start-up costs for the Chemor plant, plus production losses from the manufacturing hiatus in the bulk of the second half of FY2017 (H2FY17).
All production activities ceased in early-Q3FY17 till mid-Q4FY17 as both plants’ manufacturing licences were revoked for failing to comply with current Good Manufacturing Practices.
Commercial production for Hovid’s new tablet and capsule production line (an exten- sion of the Chemor plant) has been pushed to end-2017.
“This is another 4.5 months behind our expectations, which we suspect is due to the abrupt need for works on both existing plants to comply with CGMP standards as well as labour shortages. In total, we estimate that this extension could increase existing tablet and capsule capacity by 70% (from original capacity) but on a gradual basis,” it said.
CIMB Research pointed out Hovid is currently facing labour shortage issues, which has led to less than optimal production volumes from both plants.
It estimated that its utilisation rate was only at 70% of its previous levels given that recruitment of new workers to replace previous ones are slower than expected.
The bulk of Hovid’s workers were let go during the shutdown of both manufacturing plants to reduce overhead costs. Operations will only return to optimum levels by end2017 upon the complete recruitment of required labour.
“We cut our FY18-19F estimates by 16.3%27.6% to account for lower production volume and further delays in the Chemor plant extension.
“We would turn more positive on Hovid upon a stronger-than-expected recovery in sales volume and/or earlier delivery of the extension of the Chemor plant. Its downside risk would be lower-than-expected sales volume,” it said.