Hovid Bhd: Privatisation

Major shareholder David Ho Sue San, working with private equity (PE) firm TAEL Two Partners Ltd, have made a general offer for Hovid shares at 38 sen apiece in a bid to take the company private.

The exercise sees a special vehicle called Fajar Astoria Sdn Bhd, set up by TAEL to undertake the offer with Ho. TAEL is part of the TAEL Partners group, established in 2007 as a South East Asian-centric PE firm.

The takeover offer will also involve Ho and Fajar Astoria buying up the group’s outstanding five-year warrants at 20 sen per warrant.

Based on Hovid’s announcement on Monday, Ho, who is also the chairman and managing director, holds a 33.72% stake or 276.80 million shares and 43.57% or 140.39 million warrants in Hovid.

The offerors are proposing to buy 181.84 million units of the outstanding warrants, which represents about 56.43% of the total warrants.The warrants expire on June 5, 2018 and have an exercise price of RM0.18 per warrant.

Going back to the buyout offer, the condition of 90% acceptances means this: Ho will need acceptances of 90% of the 66.28% of Hovid shares he does not own. This translates into a total of 59% holding of the company (which works to around 484 million Hovid shares) accepting Ho’s offer.

Hence the takeover offer will fail, if Ho does not achieve this level of acceptances. However, it is interesting to note that the offerors have also stated that they reserve the right to review the level of acceptance to less than the 90% level. It will be interesting to see if they lower the condition at some point during the life of the offer.

Ho, a pharmacy graduate, is also the founder of Hovid. He took over his father’s herbal tea business. The business flourished until he bought over a building in Ipoh and named it Ho Yan Hor Medical Hall. This was later renamed as Ho Yan Hor Sdn Bhd and today it is known as Hovid Bhd.

Aside from generic drugs and dietary supplements under its own Hovid brandname, the company also does contract manufacturing for other drugmakers. About 95% of its revenue is said to be derived from the Hovid brand name.

He later founded another company called Carotech Bhd, which went public on Bursa Malaysia’s Mesdaq market, now known as ACE Market, in 2005.

The Ipoh-based Carotech specialised in extracting tocotrienol (vitamin E) from crude palm oil and became well-known globally, conquering about 80% of global palm vitamen E market share. But Carotech’s fortunes dwindled and was delisted on May 11, 2012 for failing to submit its regularisation plan to Bursa Securities for approval within the stipulated time.

A series of events took place after this where Ho and other directors at Carotech and Hovid were publicly reprimanded by the authorities for breaching listing requirements with regard to both companies’ financial results.

So why does Ho want to privatise Hovid? The offerors did not indicate the rationale for the privatisation.

Nevertheless, it is pertinent to note that Hovid had slipped into the red in financial year ended June 30, 2017 (FY17).

The company posted a net loss of RM1.53mil from net profit of RM17.9mil, against a 10% drop in revenue at RM169.94mil from RM189.03mil. It has RM15.9mil in cash, with debt of RM65.6mil as at June 30, 2017.

The earnings, according to Hovid, was dragged by the disruption in manufacturing activities arising from the revocation of its manufacturing licences of two plants. This subsequently affected its sales volume and led to higher operating costs from improvements on quality systems and production processes.

Hovid’s manufacturing licences of two plants were revoked after an audit by the National Pharmaceutical Regulatory Agency (NPRA) revealed that its Pharmaceutical Quality System were not in compliance with the latest Good Manufacturing Practice. The revocation of licence was linked to Hovid recalling its hypertension pills, Ternolol 50mg on Jan 5, which triggered the audit by the NPRA.

Hovid’s earnings before interest, tax, depreciation and amortisation (Ebitda) margin also suffered for the fourth quarter FY17, shrinking to a mere 4.2%, from fourth quarter of FY16’s 13.5%.

The company managed to obtain the license for its Chemor plant in May, but the other plant requires some physical changes, according to reports.

At the current share price of 36 sen, just two sen short of the offer price, Hovid is trading at a forward price-to-earnings ratio of 21.18 times.

Hovid’s 52-week high of 38 sen was about a year ago on Oct 14, 2016, while its 52-week low was on Jan 10, 2017 at 24 sen. However, its highest was last seen on April 21, 2015 at 53.7 sen. The stock has risen 16.13% from Oct 3rd’s 31 sen, before Hovid’s privatisation announcement.

In terms of assets, Hovid has about 16 properties and land worth some RM33mil, with the bulk last valued in June 2016. Of these, the ones valued the most include its Chemor plant and research and development centre worth RM27.15mil, a RM13.22mil pharmaceutical factory and office building in Ipoh and seven parcels of vacant land also in Ipoh worth RM11.5mil.

A month ago, CIMB Research maintained its “hold” rating on the stock, with a higher sum-of-parts based target price of 34 sen. The house cut its FY18-19 estimates by 16.3%-27.6% to account for lower production volume and further delays in the Chemor plant extension. The research house said Hovid was facing labour shortages that resulted in its less than optimal production volume.


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