Investing Ideas: Nova Wellness on a steady growth path

This article first appeared in Wealth, The Edge Malaysia Weekly, on June 27, 2022 - July 03, 2022.
Investing Ideas: Nova Wellness on a steady growth path
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Tucked away in a quiet area in Sungai Pelek, Sepang, is the headquarters of Nova Wellness Group Bhd — a health and beauty small-cap company that is listed on the Main Board of Bursa Malaysia and has a market capitalisation of RM294 million (as at June 10). 

Nova Wellness develops and manufactures its own range of nutraceutical products — currently, there are about 180 — before selling them to consumers through 920 pharmacies nationwide. 

According to its 2021 annual report, the main bulk of its revenue was derived from the sales of dietary supplements (59.4%), such as Vitamin C tablets, and functional food products (21.1%), including organic chia seeds, vegetable oil blend and herbal tea. The rest came from the sales of skincare products (6.7%) and original equipment manufacturing of nutraceutical products (12.8%).

Founded in 1989 by Phang Nyie Lin, 68, Nova Wellness remains tightly controlled by the Phang family today. It has attracted the attention of some investors due to its strong balance sheet, steadily growing revenues and attractive profit margins. It is also one of the companies that have done well during the pandemic period.

Lim Tze Cheng, a fund manager and chief research officer at independent research firm Trident Analytics Sdn Bhd, likes the company for its solid balance sheet with no debt and ample cash. 

Based on its 2021 annual report, the company has current assets of RM57.4 million, with RM25.96 million in short-term investments and RM1.72 million in cash and bank balances. Its current liabilities are RM3.98 million, consisting of trade and other payables and current tax liability. It also has non-current assets worth RM47.06 million against non-current liabilities of RM6.53 million. 

Lim points out that the company’s revenues have been growing steadily, hitting RM40.48 million in the financial year ended June 30, 2021 (FY2021). On average, its revenues have grown by above 15% per annum from FY2018 to FY2021. 

Listed in 2017, Nova Wellness recorded a net profit of RM14.6 million in FY2021, compared to RM13 million in FY2020.

What stands out for Lim is the company’s profit margin of at least 33% in the past five years, which is impressive among companies in the pharmaceutical industry. 

“The high profit margin is due to its business model of appointing exclusive distributors within specific areas, which prevents a price war from happening,” he says. 

Nixon Wong, chief investment officer at Tradeview Capital Sdn Bhd, a boutique asset management firm specialising in small- and mid-cap companies, concurs with Lim’s views. 

Wong notes that Nova Wellness has been doing well in product innovation as it constantly launches new products that justify its earnings growth in the past years.

Nova Wellness’ skincare products

Illiquid shares and a conservative business model 

Nova Wellness, however, is not on the radar of many analysts and investors primarily because its shares are illiquid. Bloomberg data shows the Phang family controls at least 66.36% of the company’s shares. 

Loui Low, head of research at Malacca Securities Sdn Bhd, says lack of liquidity could be why the firm is valued at a relatively low price-earnings (PE) multiple of about 15 times at 92 sen per share (as at June 10). 

“It is a solid company. Its margin is solid. The growth factor is there, although you can say it is a smaller player among its peers [in the pharmaceutical industry]. 

“That’s probably why it’s not traded at a higher PE multiple of 20 times [like some of its peers].” 

While some investors favour the company’s business model which helps it preserve its margins, others might think that it is too conservative and its growth is too slow, says Lim. 

“If the company starts distributing its products to renowned pharmacy chains, its profit margin could be eroded. But its revenues and market share could grow much faster, and the absolute profit number will increase. This is another way to look at it.”

Other risks that fund managers see in the company include rising raw material cost as the ringgit has weakened against the US dollar in recent months. 

It could also be facing a succession risk, as Phang has played a massive role in developing the company’s slew of products, says Low. “However, we were told that the founder has built a team and transferred knowledge to its various departments. A lot of SOPs (standard operating procedures) have been created as well.”

Staying on the growth path, albeit conservatively 

During the interview with Wealth at the Nova HQ, Phang affirms investment experts’ views that the company has no debt and is in a net cash position.

“As for the RM25.96 million invested in short-term investments [shown in the 2021 annual report], they are invested in money market [instruments] that provide slightly higher returns than fixed deposits. 

“We do that as we have completed our major capital expenditure. The second factory [to manufacture skincare products] is mostly done. We have another two pieces of land in Sepang for further expansion. But we are not going to use them for now.”

Phang understands that some quarters might view his business model as conservative. But the company will continue to expand its distribution channel gradually using the current distribution model to preserve profit margin for itself and its distributors, he says. 

A decent margin is key for a business to operate sustainably, and a price war is the biggest pain point for all businesses, especially pharmacies. Phang understands this as he once ran a pharmacy at Sepang.

“I was a distributor before. I know the pain of a price war. And I was determined to solve this problem early on. I believe all businesses need a reasonable profit to function well.” 

Instead of encouraging pharmacies to push aggressively for sales with price discounts, the company prefers to spend more time on educating pharmacists about the benefits of its products, and advises them to focus on listening to and educating customers before providing them with Nova’s products.

Happy customers with better health tend to be loyal customers, says Phang. “The beauty of this business is that you get repeat customers when they are happy.” 

He says the company is not considering the multilevel marketing model used by certain pharmaceutical companies. 

“We think pharmacists are more competent in distributing our products to consumers than agents. They are more knowledgeable. And we don’t want to train part-timers [about our products], only to find them doing other things later on. Such a business model is more costly in the long run, and the quality of advice provided to customers will not be there,” he adds.

Still, the company will be increasing its distributor count from 920 to 1,200 in the next two to three years. “Malaysia has more than 3,000 pharmacies. We want to get one-third of them [to become our distributors].” 

Like many entrepreneurs of the older generation, Phang experienced several crises in the past decades. But what haunted him the most was the Nipah virus outbreak in 1998 to 1999. 

Phang, who was born to a family of farmers in Sepang and once ran an animal-health business in the district, not only witnessed many animal-related businesses fail in a short period of time during the outbreak, but also saw farmers lose their lives. 

“Sungai Pelek is my kampung. It was a big farming area before the virus outbreak. When that happened, I lost a lot of money, a few million, and our customers died, more than a hundred of them. Workers had no work to do and Sepang was like a ghost town,” he recalls. 

The experience, which had a lasting impact on Phang, partly contributed to his prudence in managing finances. 

After his animal-health business failed, Phang ventured into human health products by taking out a RM3 million loan to set up a factory. The money was spent in two weeks, and he had to sell off his pharmacy to repay the loan. It was only five years later, when the factory was up and running, that he started seeing cash coming in steadily. 

“Since that day, we have had no more loans. We are doing fine today with good cash flow. People say that a loan can make you bankrupt. If you don’t have a huge one, you’re quite safe. If you’re overexposed, it is dangerous.”

Nova Wellness’ functional food products

Growth drivers 

Phang is particularly excited about Hepar-P, the company’s newest offering and first herbal-based product for treating liver injury, which passed a clinical trial recently. This means it can be recommended to patients by hospital doctors. 

According to the company’s website, the trial which commenced in 2018 completed its first-ever randomised, placebo-controlled, double-blinded and multi-centre clinical testing in patients with non-alcoholic fatty liver disease. It was conducted at three sites: Hospital Sultanah Bahiyah in Alor Setar, Hospital Ampang and Hospital Selayang.

Three hepatologists and gastroenterologists led the trial as clinical investigators, while Datuk Dr Muhamad Radzi Abu Hassan — national head of gastroenterology and hepatology at the Ministry of Health — was the national principal investigator. 

Phang explains this was the third clinical trial of the product. The earlier two weren’t successful for various reasons, including an insufficient number of patients as participants, and not because of product efficacy. 

“The third trial shows that it has a positive effect on protecting our liver. We consider it a good result. It has taken us 25 years to finally achieve this,” he says.

Nova Wellness has appointed a distributor — a supplier of medical machinery and diagnostic tools — to distribute Hepar-P to hospitals. It will be one of the company’s growth drivers. 

For now, the company distributes functional food products under the ACTIVMAX brand name to 32 local government hospitals. These products are mainly nutritional drinks that cater for patients with specific conditions.

“We developed some products recently during the pandemic, including one for children with epilepsy. They need these nutritional drinks to control their conditions. 

“The doctors did not have the necessary products for them as the importers stopped bringing them in. We developed a product for the doctors within four months.”

Another growth driver for the company is its development of new health food products, such as low glycaemic index bread, bun and sourdough under the “Healthy Joy” brand name. These products are distributed through pharmacies to their existing customers, and will be available at health food stores and shops later on when they gain further traction. 

Why is a nutraceutical company venturing into the food and beverage business? Phang says these products are part of the solution to help people live a healthy lifestyle, which is the company’s mission. 

“[Commercially-available] bread has high sugar content as it is made of flour. Overeating it could cause diabetes. That’s why we want to have healthy bread to solve this issue. Consumers aren’t aware of this, so we need to educate them.”

He says Healthy Joy bread and buns have received positive response from diabetics. 

“It is a very competitive market, but a huge one. We estimate the whole local bread market at RM4 billion per year in terms of revenue.”

With much shorter expiry dates and different logistics requirements, Phang admits that the food and beverage business is a different ball game from the nutraceutical one. But some pharmaceutical companies have started to distribute healthy food alongside healthcare products.

“For now, we are just at the beginning of the learning curve,” he says. 

Responding to some investors’ concerns about the lack of liquidity with regard to the company’s shares, Phang says he will only consider investors who can add value to the company over the long term. 

“We want to work with partners who can help [to grow] our business, rather than just pump in money. We want synergies and integration, whether vertical or horizontal, across the value chain. We have a good [cash] reserve, actually. We also understand the issues and are looking for good investors,” he says.