Friday, 24 July 2020

Bioalpha: A Fat Yet Thin Contract Secured

On 22nd of July 2020, Bioalpha Holdings Bhd who is involved in agricultural development, R&D, manufacturing, distribution and marketing of functional foods and health supplement products announced that it has won a whopping RM2.1 billion contract.

It is a "Partnership Agreement & Supply Contract Agreement" with 2 China based companies to supply ingredients for health food and nutritional meals to private and public sector in China.

I thought Malaysia normally source from China but now it's the other way round...

The value of the contract is approximately RMB700mil a year (RM426.7mil) for 5 years, but it's subjected to annual renewal. It will start as soon as Sep20.

For its FY19, Bioalpha's revenue was RM62mil with PATAMI RM9mil (EPS 1.05sen). With its usual share price of 12-14sen, market gives it a PE ratio of around 12.

Its share price started to move from 12.5sen to 18sen in 3 days time before the announcement. After the announcement, it shot up to almost 40sen and closed at 31sen, enjoying a gain of 72% in a day. Its warrant A gained a whopping 264% in a day.

Bioalpha to boost exports of health supplements, eyes personal ...


An annual revenue of RM426mil is impressive for a company who has a usual revenue of around RM60mil per year. That's why its share price reacted ferociously.

However, Bioalpha's MD mentioned that the internal KPI is to achieve gross margin of 3-5%. It's gross margin not net profit margin.

Gross margin = Revenue - cost of goods sold (includes materials and labour directly used). However, it usually does not include admin, distribution and sales cost, as well as depreciation, finance cost and tax.

To me, a gross margin of 3-5% is quite low and "dangerous". It can "accidentally" turn into loss if the management is not careful enough.

If I assume the NET PROFIT margin to be 3% which seems rather generous in this case, Bioalpha will get about RM13mil net profit a year from the contract. If other business stay the same as FY19 which generated net profit of RM9mil, total net profit might reach RM22mil for a full year.

This represents a significant leap and milestone for Bioalpha.

Base on current outstanding shares of 1,041mil, projected EPS will be 2.1sen. With current share price at 30sen, forward PE will be 14.3. This does not include 133mil warrants which are going to expire in Jan 2022.

Whether this forward PE ratio is fair, high or low, you have to make your own judgement.

If its net profit margin drops to 2%, projected EPS & PE will be 1.7sen & 17.6 respectively at share price of 30sen.

What if the net profit margin turns out to be lower than 2%, or the contract is not renewed after one year?

Anyway, this contract might serve as a stepping stone for Bioalpha to expand its business in China and open up bigger earning potential. It might take the company and its share price to a new level.

Buy, sell or hold, the decision is always yours.

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