Hovid remains a Hold by CIMB Research

01 September 2015

KUALA LUMPUR: CIMB Equities Research said Hovid’s FY6/15 core net profit was 5% shy of its forecast and 6% short of consensus expectations.

It said on Tuesday the variance in earnings was due mainly to a sales shortfall, which the company attributed to the implementation of GST in April 2015.

On top of a normal dividend per share of 0.5 sen, it declared a surprise special DPS of 0.35 sen, bringing YTD DPS to 1.35 sen, higher than the one sen expected.

“We lower our FY16-17 EPS by 7%-12% to reflect higher costs and a lower profit margin. This cuts our sum-of-part based target price to 42 sen. Hovid remains a Hold as its upside is limited. We prefer IHH,” it said.

CIMB Research said although Hovid’s revenue tumbled 11% on-year in 4Q15, its core net profit grew 4% to RM4.8mil, thanks to a lower tax rate. The company attributed the lower revenue to the introduction of GST in April 2015, which had encouraged its local customers to stock up in 3Q15 and reduce their purchases in 4Q15.

Hovid also disposed of a non-core subsidiary in 4Q15, which had contributed 5% to Hovid’s sales in 4Q14. However, its effective tax rate normalised to 22% from 37% last year due to lower non-deductible expenses. This was the key driver of the earnings growth in 4Q15.

“Hovid achieved an EBIT margin of 14.7% in 4Q15, lower than the 15.6% registered in 4Q14. However, this is a sharp improvement on 3Q15’s 12.5%. We believe that the weak ringgit helped to improve its profit margin given that around 55% of its revenue came from the export markets.

“Although Hovid should benefit from the weak ringgit, we estimate that its EBIT margin could stay in the 14-15% range in FY16 due to high start-up costs and higher depreciation charges related to its new tablet and capsule plant.

“The new plant, which will raise its tablet and capsule production capacity by 30%, will start operations this week. Hovid expects the plant to achieve the optimal utilisation rate in four to six months,” CIMB Research said.

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