Period

3Q15/9M15

Actual vs. Expectations

9M15 net profit of RM58.9m (-23.2%) is below our expectation, matching only mere 62.0% of our full-year forecast. Consensus comparison is not available as the stock is not widely tracked.

The negative deviation can be attributed to unexpected change in sales mix which resulted in lower profit margin.

Dividends

As expected, a third interim single tier DPS of 10.0 sen was declared, lifting 9M15 DPS to 30.0 sen (vs 9M14: 30.0 sen) which is in line with our expectation.

Key Results Highlights

YoY, 9M15 revenue jumped 20.1% to RM751.6m thanks to the strong pre-GST buying in 1Q15 as well as successful launching of new products. Gross profit only managed to grow 1.4% to RM191.4m due to the higher product sourcing costs on the back of weaker MYR. Net profit dipped 23.2% to RM58.9m as selling and administration expenses spiked 38.6% due to the incentive given to distributors with further dragged from a higher effective tax rate of 26.3% (9M14:25.0%).

QoQ, 3Q15 revenue surged 28.6% to RM241.7m due to low base effect as 2Q15 revenue dipped subsequent to front-loading in relation to GST implementation in 1Q15. Gross profit grew at a slower pace of 23.0% to RM57.2m with gross margin shrinking 1ppt to 23.7% as a result of unfavourable product mix changes as we believe customers were down-trading to small-ticket items, due to lackluster consumer sentiment. Net profit grew 15.2% to RM11.8m as effective tax rate for the quarter was higher at 28.8% (2Q15:23.1%).

Outlook

The healthy top line growth was encouraging particularly considering that it was achieved on the back of weak consumer sentiment. Meanwhile, margins were squeezed, as expected with the higher product sourcing costs, unfavourable product mix changes as well as higher incentive paid to reward distributor. However, we think that passing on the additional costs by increasing selling prices would be unlikely in view of the persistently weak consumer sentiment.

Moving forward, we foresee the Group to continue driving sales by encouraging its distributors with sales incentive as well as embarking on more marketing and sales activities to counter the weak consumer sentiment. With that, we forecast the net profit to decline 18.8% in FY15 due to higher product costs and marketing expenses. Despite near-term weakness, we expect earnings to recover in FY16 as we foresee better consumer sentiment by FY16 and being further supported by its strong brand image and marketing activities to drive sales.

Change to Forecasts

Our FY15E-FY16E net profits were trimmed by 11.1%- 14.7% as we lower our margin assumptions to take into account the change in the product mix.

Rating

Maintain MARKET PERFORM

Valuation

Source: Kenanga Research - 19 Nov 2015