CGS-CIMB on Friday (Jan 7) initiated coverage on Hyphens Pharma 1J5 : 1J5 0%with an "add" call and target price of S$0.36. The research team believes the pharmaceutical and consumer healthcare company's share price has yet to reflect the value of its Novem acquisition.

The acquisition is also supportive of the group's earnings per share (EPS) growth, the research team noted. Hyphens is currently trading at 11.1 times CGS-CIMB's FY2022 earnings estimates - 1 standard deviation below its historical mean.

CGS-CIMB's target price of S$0.36 is 13.5 times its estimates for FY2022 earnings and 1 standard deviation above its historical mean since the group's listing in 2018.

This represents a potential upside of about 18 per cent from the counter's trading price of S$0.305 as at 1.10 pm on Friday. Hyphen's shares were up 3.4 per cent or S$0.01 at the time.

On Nov 9 last year, Hyphens said it will acquire the Novem group of companies - Novem Healthcare, Novem Pharma and Novem Sciences - for S$16.3 million to augment its current healthcare products and services. The group completed the acquisition on Dec 3.

CGS-CIMB analyst Tay Wee Kuang expects the acquisition to contribute to a growth forecast of 22.9 per cent for Hyphens in FY2022. He noted that the acquisition offers quality earnings with "historically superior" margins of about 18 per cent, compared to the group's historical average of about 5 per cent.

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In Tay's view, the acquisition will grow Hyphens' customer base, given that 60 per cent of Novem's business caters to the public healthcare sector, whereas 90 per cent of Hyphens' sales have historically gone to the private healthcare sector.

In addition, Hyphens could "reap further synergies" through cross-selling opportunities, given the differing sales channel exposure between Hyphens and Novem, Tay said. The group will also be able to bring Novem's portfolio to its other operating markets such as Vietnam, Malaysia and Indonesia, he added.

"We believe the value behind the acquisition of Novem remains overlooked due to the financial attractiveness of the acquisition, as well as the potential latent synergies that will bring longer-term value for Hyphens," Tay said.

The report also highlighted Hyphens' maintenance of a strong cash position since its listing in 2018, which is supportive of "sustainable and growing dividends". In fact, Hyphens' net cash position of S$26.8 million as of 1H2021 and cash position of S$33.6 million are "at record levels", according to Tay.

The analyst also likes Hyphens for its "resilient" business model and growing product portfolio, as well as its sales and distribution channels that will "drive future earnings growth".

"Based on the lead times for acquiring product registration and sales conversion, we think that Hyphens will be able to achieve stable, sustainable growth moving forward, with potential to grow its product portfolio through various means given its net cash position," said Tay.

READ MORE:

• Hyphens Pharma to acquire Novem companies for S$16.3 million

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• Brokers' take: KGI upgrades Hyphens Pharma to 'outperform' after Q1 comeback