High Demand Expected for Sleep Improvement Product

The author is an analyst of NH Investment & Securities. He can be reached at jack.baek@nhqv.com. -- Ed.

 

Earnings growth even outpacing attractive dietary supplements market average

Novarex’s 1Q20 results topped our estimates and consensus on rising demand amid the Covid-19 outbreak and sustained high orders growth from major customers. Valuations are to further re-rate on steady earnings growth, helped by 2H20 launches of new functional ingredients that have obtained product-specific health functional food approval from the government.

1Q20 review: Earnings top market expectations

Novarex’s 1Q20 results exceeded our expectations and consensus. Delivering W50bn in sales (+63.1% y-y) and W5bn in OP (+102.7% y-y), the firm’s 1Q20 earnings growth outpaced the dietary supplements market average.

We mainly attribute the 1Q20 earnings surprise to: 1) a March surge in orders from major customer; and 2) favorable sales of the majority of firm’s wide-ranging product lineups, both in response to the Covid-19 outbreak. Standing out in particular is continued high sales growth for the company’s Lutein, Plantarum, Astragalus Extract, and Boswellia offerings.

In 2H20, it will be necessary to pay attention to sales of Lactium (improves sleep quality), a new functional ingredient that recently (February) received product-specific approval from the government. With Lactium-based products expected to debut at home shopping channels in July, we anticipate high demand from clients going forward. Especially helping to create new demand should be the absence of major products related to sleep improvement in the dietary supplements market. Considering the characteristics of functional ingredients (protected by patents for six years), Lactium should become one of the firm’s flagship product lineups going forward.

Earnings surprise for 1Q20 signals start of 2020 earnings uptrend

For full-year 2020, we now boost our consolidated sales and OP projections to W209.0bn (+31.4% y-y) and W22.9bn (+40.6% y-y), respectively. Overall earnings should continue to expand going forward on: 1) the expanding M/Ss of existing customers such as CJ CheilJedang and Nutrione in the dietary supplements market; and 2) the release of new functional ingredients (such as Lactium) that have obtained product-specific approval from the government.

Given the addition of sales from the firm’s Osong plant (operations to start in earnest from 2H21), the anticipated strong earnings growth anticipated in 2020 should extend into next year. Moreover, with Covid-19 crisis boosting demand for health functional food, we expect strong sales growth at OEM/ODM players to continue, in turn translating into further valuations re-rating. Trading at a 2020E P/E of 12.8x, we view Novarex’s shares as remaining undervalued given the firm’s promising growth potential.

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