On the lookout for growth

■ We initiate coverage on HYP with an Add rating and a DCF-derived TP of S$0.36 (WACC: 9.4%) post its acquisition of Novem.
■ We like HYP for its resilient business model and growing product portfolio as well as sales and distribution channels that will drive future earnings growth.
■ Re-rating catalysts: accretive portfolio acquisitions and positive Ceradan patent applications. Key risks: movement restrictions in medical channels.

Novem acquisition supportive of EPS growth

On 9 Nov, HYP proposed the acquisition of Novem, a Singapore-based pharmaceutical distribution business. Valued at c.S$16.3m, the acquisition is priced at c.3.6x P/B relative to HYP’s of c.1.8x (based on 1H21 figures) and offers quality earnings with historically superior margins of c.18% compared to HYP’s historical average of c.5%. The acquisition will grow its customer base as 60% of Novem’s business caters to the public healthcare sector (i.e. public hospitals and polyclinics). HYP could reap further synergies through cross-selling opportunities given the differing sales channel exposure between HYP and Novem, as well as bring Novem’s portfolio to HYP’s other operating markets such as Vietnam, Malaysia and Indonesia. The earnings-accretive nature of the acquisition is supportive of our forecasted EPS growth of 23% in FY22F.

Operating in an industry with a long runway for growth

The fragmented pharmaceutical industry offers HYP plenty of inorganic growth opportunities, such as (1) business acquisitions, (2) brand acquisitions and (3) partnerships with brand principals. HYP has demonstrated its penchant for growth historically, acquiring brands such as Ocean Health (health supplements) and TDF (dermatology) in 2016, and CG 210 (scalp care) in 2020. With the acquisition of Novem, HYP adds over 40 brand principals and 150 products to its portfolio. HYP continues to maintain a strong net cash position of S$22m post acquisition of Novem as of 9M21, which allows it to remain nimble in the face of future expansion opportunities.

Initiate coverage with an Add rating and target price of S$0.36

Our DCF-based TP of S$0.36 (WACC: 9.4%, beta: 1.0, g: 1%, risk-free rate: 1.8%, COE: 10%) represents an FY22F P/E multiple of 13.5x, 1 s.d. above its historical mean since its listing in 2018. We believe that HYP’s share price has yet to reflect the value of its business acquisition of Novem, the first since its listing. HYP currently trades at 11.1x FY22F P/E, close to 1 s.d. below its historical mean. Furthermore, HYP has laid the groundwork for future growth, with multiple distribution agreements allowing it to expand its sales and distribution network into China, Sri Lanka, and South Korea. Re-rating catalysts: potential approval of pending patents of Ceradan to augment sales. A key downside risk is movement restrictions in medical channels (hospitals, clinics etc.) dampening sales.