Period  3Q13/9M14

Actual vs. Expectations The results were below expectation as 9M14 net profit only accounted for 46.6% of our forecast. The negative variation can be attributed to the slower-than-expected recovery in the Thai market as well as weaker-than-expected sales in the local market.

Dividends  DPS of 2 sen was declared, lifting YTD DPS to 8 sen (vs 9M13: 9 sen), which was in line with our expectation of 10 sen for FY14.

Key Results Highlights QoQ, PBT rose 9.9% to RM12.9m despite a 12.9% fall in the revenue as lower operating expense (-18.2%) was incurred during the quarter. Meanwhile, the net profit was 25.4% higher vis-à-vis 2Q14 thanks to the normalized effective tax rate of 19.3% as compared to 29.3% in the previous quarter.

 YoY, net profit shrank 73.8% on the back of a 53.9% slump in revenue mainly due to the lacklustre performance in both local and overseas market; the Thai market is yet to show any significant recovery from the political shake-up while the local market suffered from soft consumer sentiment.

 YTD, revenue dipped 44.3% due to the reasons mentioned above while similarly net profit slid 66.6% to RM35.8m (vs

RM107.3m), in line with the huge decline in revenue and further dragged down by start-up costs in Myanmar operations as well as higher effective tax rate of 20.3% (vs 15.2%).

Outlook  We are disappointed with the numbers as 9M14 net profit of RM35.8m only accounted for less than 30% of RM121m the Group recorded in FY13. The Thai market is still struggling to embark on a quick recovery after the political unrest while the local market is dealing with high level of competition in a saturated and challenging market condition.

 Moving forward, the recovery in the Thai market should see slight improvement following the election on July 2014 with the material effect to be reflected in the 4Q14 results. As for the local market, we foresee persistent weakness due to the poor consumer sentiment on the back of higher living cost environment.

Change to Forecasts We slashed our earnings forecasts as we factor in lower distributor productivity in both Thai and Malaysia market as well as higher effective tax rate of 20% (from 17%-19%) which resulted in 35% and 26% downward revisions in forecast FY14 and FY15 net profit, respectively.

Rating Downgrade to UNDERPERFORM (from Market Perform)

 Valuation appears to be pricey following the earnings cut with its last closing price trading at 15.1x PER FY15F, a mere 5.6% discount to the 16x PER of larger-cap Amway which enjoys more earnings stability.

Valuation  We downgrade our Target Price to RM2.00 (from RM2.70) correspondingly with our earnings cut. We continue to peg our TP at 12.8x FY15 PER, which implies 3-year mean average PER.

Risks to Our Call Better-than-expected recovery in Thai market.

 Better-than-expected consumer sentiments in local market.

Source: Kenanga