We came away feeling more positive on its prospect after a meeting with the key management featuring founder, Mr Tan Kai Hee, General Manager, Mr Tham Yoke Lon and CFO, Mr Hew Von Kin. Its MLM division is expected to continue its steady run with the backing of strong new recruitments and sound product strategy while the other business segments are expected to perform modestly. Post-meeting, we raised FY17E and FY18E net profits by 1.4% and 13.4%, respectively. Correspondingly, our Target Price is nudged higher to RM3.64 (from RM3.21), based on unchanged 15.2x PER FY18E which implies +1.5 SD over the 5-year mean. Maintain MARKET PERFORM call.

Re-look on 9M17 results. 9M17 revenue surged 36.3% to RM285.6m, mainly driven by impressive growth in MLM division (+58.6%), thanks to the strengthening of distributors base to 120k distributors, (9M16: 70k distributors), supported by the strong sales of personal care and household consumer products. 9M17 operating profit jumped 62.6% to RM54.2m, again boosted by MLM division (+80.3%), with expanded operating margin of 19.0% (9M16: 15.9%). The MLM division contributed 78.0% of the 9M17 group operating profit (9M16: 70.6%). As a result, 9M17 net profit grew 64.2% to RM41.3m. Moving forward, management is confident that the MLM segment momentum can be sustained with younger generation of distributors joining the force vying for extra income in amidst of the challenging economy and job market.

Cautious on wholesale and retail segments. Despite the wholesale and retail divisions’ 9M17 operating profits growing at 41.9% and 41.6%, respectively, management is maintaining a conservative stance as both divisions are vulnerable to currency risk, weak consumer sentiment and attributed the strong performance to seasonality factor. The operating environment for retail segment remains challenging with its focus on high margin in-house brands (c.40% for retail sales) to remain profitable, but the company is not scaling down this division as it complements other segments.

Incentives and Promotion to maintain momentum. To keep its distributors momentum going, the company allocates budget of RM10m every year for its incentives and promotion. The incentive trips are divided into two trips for each half of the year. The company targeted at least 600 eligible distributors per trip for 2017 (2016: 500 distributors). In conjunction with 25th SHOM Anniversary Promotion for 2017, the company is planning to organize recognition night for MLM top leaders. The company targeted at least 100 eligible distributors (2016: 40 eligible distributors). This incentives trips and promotion are key factors in expanding the number of its distributors while maintaining the loyalty of its existing distributors.

MLM steady momentum. MLM continued with its momentum, which was driven by both expansion in distributor base and the strong productivity on the back of the effective product strategy and rewarding incentive system. The increased contribution of MLM division has also reduced the risks of other operating divisions, including wholesale and retail divisions, which are exposed to the currency risk and weak consumer sentiment. Moving forwards, the company is expanding its MLM business, venturing into fashion and beauty care under the brand “Infinence”, supported by the expertise of the company non-independent and non-executive director Prof. Datuk Dr Choo Yeang Keat (also known as “Jimmy Choo”) and professional consultants (Currently, Rizman Ruzaini).

Maintain MARKET PERFORM call with higher Target Price of RM3.64 (from RM3.21). We raised FY17E and FY18E net profits by 1.4% and 13.4%, respectively, as we were previously too conservative with the distributor force growth. Correspondingly, our Target Price is nudged higher to RM3.64, based on unchanged 15.2x PER FY18E which implies +1.5 SD over the 5-year mean. We are maintaining our neutral stance on the company on its strong brand names, sturdy balance sheet and generous dividend pay-out.

Source: Kenanga Research - 10 Apr 2017