HOVID BERHAD Value Evaluation

Hovid is involved in one of the Malaysia’s pharmaceutical manufacturer industry. One of the products that has earlier set up Hovid’s image is its herbal tea product line Ho Yan Hor where it is suitable for all kind of consumers. As an early producer of herbal tea pack, the company further diversifies into product lines which include supplements and all kind of agents. Barriers of entry are very high as there is tight government regulatory and millions worth of patents to be rented. Recently, confirmation of generic product’s patent expiry has allowed the firm to produce this new kind of drugs where it results in significantly lower cost. According to the company’s annual report, it has applied for the use of this kind of drugs in several countries where it gains an unfair competitive advantage ahead of other competitors to prepare themselves for the change of traditional drug to generic based products. In the chairman statement itself, we can gain full insights and detailed future directions of the company where it shows that the board and management has full knowledge and control of its plan. This is especially important when we expect future earnings growth for certain company where the management can develop highest value of skills to strive higher. 

Again, survival and outstanding in pharmaceutical industry is almost mission impossible. With Malaysia aiming to become country with high income before 2020, introduction of minimum wages policy has driven the company cost to climb and slash the margin. Also, capital expenditure is very high where the company spends a lot of capital on patented and non-patented drugs. Research and development is vital to stay on the competition’s track where large portion of funds will be utilized. Also, producing patented drugs also means that the competitors are also doing the same. Therefore, strong competition still awaits Hovid in the future.

Cash flow from operating activities faced extreme volatility during the past ten years. Even worse, the recent cash is at a lower level than ten years ago. Although both ratios are up to satisfactory level, it has not been consistent throughout the past ten years which is lack of stability. There is a moderate amount of money averaged RM3.5 million spent on capital expenditure which is minimal. In recent years, the company fulfilled its obligations by gradually paying off all the loans drawn few years back. Although there are no dividends for few consecutive years, I can see that the company is having a positive restructure based on its cash management.  Where intrinsic value is irretrievable, gauge of book value is ([223680-37807]/762080=RM0.244) where the market price is still higher at RM0.335.
Stock: Hovid Code: 7213