KOTRA Industries Bhd should be a major beneficiary of pent-up consumer demand for neutraceutical products amid the recent resurgence of Covid-19 cases. Its over-the- counter (OTC) products (60% of its topline) offer immunity benefits to consumers at different stages of life. The stock is trading at 10x FY24F price per earnings, in line with its historical mean. We trim our ESG score to 3.1 from 3.2, after revisiting the metrics for all three pillars.

Covid-19 on the rise again. The number of Covid-19 cases in Malaysia surged by 88% to 12,757 during the second week of December, from 6,796 the week prior. The situation is expected to worsen in tandem with the year-end festive season and school holidays, according to Health DG Dr Muhammad Radzi Abu Hassan. Given the higher chances of infection because of the new Covid-19 variant, coupled with a low incidence of wearing face masks in public again, the rise in confirmed cases could spike up the demand for cough and flu medicines — just like what happened in 2H22. Our base case scenario indicates that Kotra's OTC segment may see 3% YoY growth in FY24 net profit, should consumer demand be greater than expected (assuming a 13% YoY increase, in line with historical ie 2021 retail pharmacy sales growth).

Rising health awareness. The increase in health awareness among consumers in terms of boosting immunity against Covid-19 and other non-communicable diseases should be a near-term re-rating catalyst that will propel the growth of the consumer healthcare product market. According to Vodus Research, Malaysians have become more health- conscious due to the Covid-19 pandemic, as well as the high rates of obesity and diabetes. In 2021, 50% of all Malaysians consumed health supplement products that include vitamin C, multivitamins and fish oil.

Outlook. The RHB economist is expecting a rosier GDP growth outlook for Malaysia in 2024, underpinned by a pick-up in economic activity by 1H24. An easing monetary policy would further support global economic conditions, as nutraceutical products are regarded as discretionary products. Kotra's mid- to longer-term growth prospects should be anchored by rising health awareness among consumers and the trends associated with an ageing society. The construction of a new manufacturing line (to be completed next year) could offer it the opportunity to tap into manufacturing products in different dosage forms that it currently is not involved in.

We leave our earnings estimate unchanged. Our target price (TP) is based on 12x CY24F PE, or 0.8SD above its pre-pandemic five-year historical mean of 11x, as the pick- up in consumer discretionary spending could boost the demand for neutraceutical products next year. Our TP incorporates an ESG premium of 2% as Kotra's ESG score is a notch above the country's median.