Period  4Q14/FY14

Actual vs. Expectations FY14 net profit of RM47.1m (down 61.1%) was slightly below our expectation; accounting for 94.4% of our fullyear forecast. The negative deviation can be attributed to the lower-than-expected contribution from associates.

Dividends  DPS of 2 sen was declared, lifting YTD DPS to 10 sen (vs FY13: 16 sen), in line with our expectation of 10 sen. That translates to a dividend yield of 4.4% based on the last closing price.

Key Results Highlights  QoQ, 4Q14 revenue shrank marginally by 4.3% to RM54.7m due to the soft demand in both domestic and export market. However, net profit managed to increase by 8.9% to RM11.3m thanks to the lower expenses incurred during the quarter, as well as the lower effective tax rate of 12.8%.

 YTD, revenue slumped 41.6% to RM243.7m due to the lacklustre performance of both domestic and overseas market whereby the core distributor force (CDF) declined by 18-22% in the major markets. As a result, net profit recorded a decline of 61.1% to RM47.1m, further dragged down by lower associate contribution of RM24.6m, down 51.6%.

Outlook  Moving forward, the Group is adopting ‘small ticket items’ strategy in order to attract more distributors, particularly young entrepreneurs who are looking for low entry-costs ventures. Although the strategy might be able to attract higher CDF in a long run, we foresee the earnings to be dragged down by the transition period in shorter run, based on the experience of another local MLM company.

 Meanwhile, the Group will also continue to promote the ‘big ticket items’ which carry higher sales value and profit margin by embarking on sales campaign and product training for its distributors. As for the product strategy, new products such as red yeast rice capsules, liquid peach juice with collagen and elastin, and promeganate juice will also be launched to penetrate new market segments.

 We remain negative on the company at this juncture as the results fail to indicate any recovery. Moving forward, the local market is expected to be dogged by continuous stiff competition as well as persistently soft consumer sentiments while the overseas market is still struggling to recover from previous setbacks.

Change to Forecasts We revised down our CDF and productivity numbers of FY15 after updating the FY14 figures. As a result, our FY15 net profit is slashed by 26.7%. We also take this opportunity to introduce our FY16E earnings forecast, which indicates earnings growth of 8.5% with the CDF growth assumption of 1.1%.

Rating Maintain UNDERPERFORM

Valuation  We maintain our Target Price of RM2.00 based on blended Price-Book (PB) ratio of 2.2x (-0.5SD 3 year mean) and Price-Earnings (PE) ratio of 13.7x (-0.5SD 3 year-mean). We decide to adopt the new valuation methodology as the PER valuation is unable to reflect the true value of the company due to the earnings volatility.

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

 Better-than-expected consumer sentiment in local market.

Source: Kenanga