Is Nova Wellness Group Berhad Worth Investing In?

Nova Wellness Group Berhad (Nova) (KLSE: NOVA) is a nutraceutical company listed on the Ace Market of Bursa Malaysia since July 2018. In this article, we will take a closer look at the business, management and financial aspects of the group, to assess whether it is worth an investment. 

Background operations

Established in 1989, Nova’s principal activities are in (i) development, production and sales of nutraceutical and skincare products under its house brands; and (ii) contract manufacturing and services (OEM) development and production of nutraceutical products. Products under house brands are categorized under nutraceutical products and skincare products. Under house brand nutraceutical products, Nova offers dietary supplements and functional food. 

Nova has five house brands and these include Nova, ActivMax, Sustinex, Novavis and SP8. The group has 88 products, of which 37 are certified halal by the Department of Islamic Development Malaysia (JAKIM).

1. Dietary supplements. Nova’s dietary supplements include vitamin, mineral and herbal supplements, which are formulated to promote the daily intake of nutrients and provide various health benefits including improving blood circulation and enhancing overall health.
   
2. Functional food. Developed with vitamins and other nutrients. Nova’s functional food products are formulated to have a low glycemic index and balanced nutrients to fulfil consumers’ daily nutritional needs and manage sugar level. 

3. OEM service for nutraceutical products. Apart from its house brands, Nova also provides OEM services for the production of dietary supplements and functional products for its customers. The OEM products are then marketed by Nova’s customers under their own brands. Nova’s OEM services include the formulation of products, procurement of raw materials and packaging materials, production and final packaging of finished products.  

Products under the house brands are the major contributor to the group’s total revenue. In 2019, the product under house brands contributed 72.1% of total revenue for the year, while the remaining 27.9% was from the OEM segment. 

Construction of a new GMP-compliant production facility

Nova is constructing a new GMP-compliant production facility for the production of functional food and skincare products. Phase 1 will involve the office, laboratory, warehouse and production facility for functional food products, while Phase 2 will involve the production facility of skin care productions. The construction of the building for Phase 1 is completed and Nova has successfully obtained the Certificate of Completion and Compliance (CCC) in May 2020. Construction of Phase 2 shall commence after physical occupancy of Phase 1.

Expansion of retail market presence

Nova’s products are sold in the domestic and overseas markets. In terms of geographical coverage, 96.0% of total revenue in 2019 was sales from local customers and the remaining 4% was from overseas customers. 

In Malaysia, Nova’s house brand products are distributed through independent retail pharmacies, which currently number up to 490 outlets. Out of these independent retail pharmacies, 243 are Nova Wellness Partner Programme (NWPP) outlets. Nova gives NWPP partners exclusive distribution rights in specific areas and bulk discounts for the purchase of house brands products. The NWPP partners also display Nova’s products in special bookshelf sections in their pharmacy outlets, which is expected to improve brand recognition. 

Furthermore, Nova works with NWPP partners to gain information on the latest market trends, consumers’ preferences and feedback on products, allowing Nova to tailor to consumer’s needs more accurately and timely. For the overseas market, there are currently two non-exclusive agents that distribute its house brand products in Indonesia and Thailand. 

In-house R&D strength

Nova’s in-house R&D capabilities enable the group to respond faster to changing customer preferences and new market developments. As part of R&D activities, pre-clinical and clinical trials are conducted on its nutraceutical and skincare products, as products with clinically confirmed health benefits gain better acceptance by consumers. 

Nova currently has two patents for Phyllanthus niruri standardised extract used in the formulations of Hepar-P Capsule and Hepar-P Forte Caplet, and two patents for the standardised extract from oil palm leaves comprising phenolic acids. Hepar-P Capsule and Hepar-P Forte Caplet have been produced and marketed since 2002 and 2006 respectively, while the two remaining patents for the standardised extract from oil palm leaves comprising phenolic acids are still at the development stage. 

Strategic investment 

Nova’s subsidiary, Nova Laboratories Sdn Bhd, invested in Topvision Eye Specialist Berhad (Topvision), a company listed on the LEAP Market of Bursa Malaysia. Topvision is an eye specialist centre which offers eye-care services ranging from general eye-care and evaluation to treatment of complex eye diseases. Nova intends to hold this investment on a long-term basis as the group believes this will strategically complement its current business since both entities are in the healthcare industry.  

Key management and substantial shareholders

The founders of Nova are husband and wife Mr. Phang Nyie Lin and Ms. Tan Sok Mooi. Mr. Phang is an Executive Director with the role of Managing Director and Chief Research Office (CRO) of the group. Two of their sons, Mr. Phang Yeen Nung and Mr. Phang Yeen Aun are also directors of Nova.  Collectively, the Phang family has a direct and indirect equity stake of 74.3% in Nova. 

As CRO and a qualified pharmacist, Mr. Phang Nyie Lin leads Nova’s R&D activities in the research of natural botanical ingredients and developing new products and improving existing products of the group. With 20 years of experience in the local nutraceutical industry, he is the driving force behind Nova Laboratories since its incorporation, which is now producing and retailing 56 nutraceutical products and 24 skincare products locally and overseas under house brands. 

(Source: 2019 annual report)

Financials  

Measure 1: Growth in revenue and profits

Barring any unforeseen circumstances, Nova should record improved performance in revenue and profits for the financial year ended 30 June 2020 compared to previous years. The improved performance resulted from the introduction of new products, increase in the number of new customers and the overall increase in sales orders from existing customers. 

Measure 2: Profitability

Nova’s 2019 gross profit margins and net profit margins of 75.1% and 36.7% are certainly eye-catching. Separately, its 2019 return on equity ratio of 14.2% is also commendable. 

Measure 3: Liquidity

Nova should not have any liquidity issues as it has recorded a relatively high current ratio of 7.0x and cash ratio of 4.7x in 2019. Furthermore, it has a negative gearing ratio of -0.5x in 2019. However, investors should monitor the group’s inventory and receivable levels closely as the cash conversion cycles are quite long (well over a year).  

Round 4: Dividends payout

Nova does not have a dividend policy or maintain a consistent dividend payout. Since the group is scaling its business hence it makes sense to reinvest profits back into the business. 

Conclusion

With a closing share price of RM1.18 as at 7 August 2020, Nova is trading at a price to earnings (PE) ratio of 29.2, with a market capitalisation of RM374.9 million. 

The nutraceutical industry in Malaysia stood at RM98.77 billion in 2017 and has a forecast compound annual growth rate (CAGR) of 2.5% from 2018 to 2022 with revenue projected to reach RM111.51 billion in 2022. Meanwhile, the dietary supplements manufacturing industry in Malaysia was valued at RM1.25 billion in 2017 with the base year growth at 9.5%, and the forecasted CAGR of the industry at 9.7% from 2018 to 2022. 

Sustainable demand for nutraceutical products is expected to come from factors such as Malaysia’s ageing population, availability of health-related information leading to increase in consumer awareness and demand for preventive healthcare, increasing prevalence of chronic lifestyle diseases, increase in the population’s disposal income, increasing financial burden arising from increasing health expenditure and the growing demand for halal-certified nutraceutical products. Nova’s prospects are bright if it can tap on to these favourable demand trends. 

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