- MYR1.11 FV based on 15x CY23 earnings. We expect Nova Wellness to post respectable double-digit FY23-25F (Jun) core earnings growth, supported by the expansion of its manufacturing facility and distribution network, and new product launches. Nova enjoys superior margins, thanks to an integrated production value chain, with a manageable impact from cost pressures. Our target P/E is at a slight discount to that of its peers, reflecting its smaller market cap.
- Positive outlook for the nutraceutical market. According to Grand View Research, the global nutraceutical market is projected to expand at a CAGR of 9% in 2021-2030. This is given the rising awareness of general health and wellbeing, with COVID-19 bolstering demand for preventative healthcare. We see significant scope for per capita consumption of health supplements in Malaysia to narrow the gap with markets such as South Korea, Taiwan, and Australia – supported by the robust growth in independent pharmacy store formats. Nova has also diversified into skincare and family protection products, which should further expand the addressable market and help drive long-term revenue growth.
- Integrated value chain a key competitive advantage. Nova’s operations span the entire pharmaceutical value chain – from product conceptualisation and R&D to manufacturing and sales & distribution. The integrated production is a key competitive advantage, in our view, as it drives product quality (efficacy and formulation) with reduced costs and time-to-market.
- Targeting a >50% jump in distributors over the next two years. Nova’s distributors are largely made up of independent pharmacies, clinics, and hospitals. The number of distributors increased rapidly from 566 in FY20 to 920 as at end-FY22. Management is now targeting 1,500 distributors by 2025. Nova observes a non-returnable policy that mitigates inventory risks and offers good sales visibility. The group also forges close partnerships with its distributors via frequent product training and education sessions, which drives customer loyalty and repeat orders.
- Double-digit earnings growth projected. We believe Nova’s core earnings will increase at a CAGR of 19% for FY23-25F, driven by: i) New product launches, ii) expansion of its retail footprint, and iii) stronger growth of higher-yield in-house brands. Despite inflationary pressure, we believe its own-brand manufacturing (OBM) business model, strong customer relationships, and relatively more inelastic demand for its products should buffer downside risks to earnings.
- Key risks include competition, slower-than-expected increases in the number of distributors, and weaker-than-expected margins.
Source: RHB Research - 26 Oct 2022