1H19 Net Profit of RM24.6m (-37%) came in below our/consensus expectations at 28%/34% of full-year estimates due to lower-than-expected sales. We cut our FY19E/FY20E NP by 26%/27% on an expectation of lower sales and assuming lower MLM distributors’ base at 140k, from 170k previously. Subsequently, we cut our Target Price to RM3.00 from RM5.15. Downgrade to MARKET PERFORM from OUTPERFORM.

1H19 below expectations. 1H19 Net Profit of RM24.6m (-37%) came in below our/consensus expectations at 28%/34% of full-year estimates due to the lower-than-expected sales. 1st interim DPS of 4.0 sen (2Q18: 6.0sen) was proposed for the quarter, which is below expectation. Thus, we cut our full-year DPS assumption to 10.0 sen (from 20.0 sen).

YoY, 1H19 core PATAMI plunged 37% dragged by: (i) lower revenue (- 31%) from lower MLM division (-39%), netted off by Wholesale division (+4%), attributed to the cautious distributors spending with the uncertainties in new government regulation, which led to stagnant distributors’ growth which was unable to match last year grand sales, (ii) contraction in EBIT margin by 1.6ppt to 18.7% from 20.3% in 1H18 from unfavourable merchandise mix skewed towards small ticket items as well as heavy discounting activities to attract distributors, and (iii) higher effective tax rate of 25.0% (1H18: 23.0%).

QoQ, 2Q19 core PATAMI increased by 24% mainly due to: (i) higher revenue (+15%) from higher Wholesale division contribution (+26%), and supported by MLM division (+9%), attributable to higher sales volume from newly launched big-ticket items in its MLM fashion and beauty care range of products as well as higher Wholesale sales from health tonic and Chinese tea, (ii) expansion in EBIT margin by 1.8ppt to 19.5% from 17.7% in 1Q19 with merchandise mix skewed towards high margin items, and (iii) lower effective tax rate of 24.1% (1Q19:26.2%).

Outlook. We expect the distributors’ base to see slower growth for the next two years amidst uncertainness with the new government regulation. Note that, the distributors’ base was reduced to 140k from 160k in FY18. Nevertheless, the group MLM division will continue to focus on new product development to widen its product range while intensifying new membership recruitment and retention programs to sustain its distributors’ base. As Chinese New Year festive season is approaching, the Wholesale and Retail divisions will carry out an extensive promotion campaign via social media platform to reach out to a younger and wider group of customers.

Cut FY19-20E NP by 26-27%. We cut our FY19E and FY20E net profits by 26% and 27% on expectation of lower sales and assuming lower MLM distributors’ base at 140k, from 170k previously.

We downgrade our call to MARKET PERFORM from OUTPERFORM with a lower target price of RM3.00 based on lower 14.0x FY19 EPS, at its 5-year forward historical mean to reflect the lower earnings growth (from RM5.15, based on 17.6x FY19E EPS, at +1.0SD of its 5-year forward historical mean).

Risks to our call include: (i) lower-than-expected sales, and (ii) lower- than-expected margin.

Source: Kenanga Research - 18 Dec 2018