KUCHING: Hovid Bhd’s (Hovid) increased capacity production is expected to improve its revenue next year.
The research arm of CIMB Investment Bank Bhd (CIMB Research) in a recent strategy report said the pharmaceutical manufacturing company has commissioned the first of its two new tablet and capsule production lines at its plant in Chemor, Perak.
The research firm noted the company plans to commission the second production line by the end of 2015.
CIMB Research believed those two new production lines are expected to raise the company’s tablet and capsule production capacity by 30 per cent.
The research firm projected that Hovid could fully utilise the new capacity within six to12 months after commissioning as its order book has always exceeded production capacity.
Apart from that, CIMB Research said Hovid is planning to add more production lines to boost its existing tablet and capsule production capacity by 70 per cent in the future.
It estimated Hovid’s tablet and capsule production capacity could double by the end of 2016.
In the meantime, CIMB Research opined that Hovid might lower its selling prices to boost the utilisation of its new production line.
It observed the sales of Hovid’s tablet and capsule products currently account for about 60 per cent of the company’s revenue.
On another note, it gathered that Hovid has plans to build a new research and development (R&D) centre in Penang.
CIMB Research noted the R&D centre is expected to be completed soon and will allow Hovid’s research team to speed up production development.
Meanwhile, CIMB Research said Hovid is a beneficiary of the weak ringgit as the company derived more than half of its revenue from the export markets.
The research firm estimated that Hovid’s profit margin should rise given the weak ringgit has a bigger impact on its revenue than on its costs.
However, CIMB Research pointed out that the positive impact of the weak ringgit on Hovid’s profit margins might be partially offset by higher start-up costs related to the production of new capacity planned by the company.
The research firm added higher depreciation charges could also put pressure on the company’s profit margin.
Nonetheless, CIMB Research still expects Hovid’s profit to improve due to the weak ringgit.
The research firm projected Hovid’s earnings before interest, tax, depreciation and amortisation’s (EBITDA) margin to improve marginally to 17.5 per cent in financial year ending June 2016 from 17.2 per cent in financial year 2015 (FY15).
With that, it believed the company’s earnings should be strengthened coupled with higher sales volume.
Hence, CIMB Research forecasted Hovid’s core earnings per share (EPS) growth of 26 per cent in FY16.
Despite the anticipation of strong earnings growth, the research firm believed the expectations of higher earnings in FY16 has been reflected in Hovid’s share price.
CIMB Research has assigned a ‘hold’ recommendation on Hovid with a fair value of 48 sen per share for the company’s stock.