FY19 CNP of RM47.4m (-37%) came in below our/consensus expectations at 95%/94% of full-year estimates, dragged down by lower-than-expected MLM sales. We cut our FY20E CNP by 7% on the expectation of lower MLM sales and we introduced FY21E CNP at RM48.3m. Subsequently, we cut our TP to RM1.95 from RM2.10 based on an unchanged 12x FY20E EPS. Reiterate UNDERPERFORM.

FY19 below expectations. FY19 CNP of RM47.4m (-37%) came in below our/consensus expectations at 95%/94% of full-year estimates, dragged down by lower-than-expected MLM sales. Final DPS of 9.0sen was declared for the quarter, bringing FY19 DPS to 13.0sen (FY18: 20.0sen).

YoY, FY19 CNP plunged 37% dragged by: (i) lower revenue (-29%) from lower sales of all division, MLM division (-36%), Wholesale (-8%) and Retail division (-2%), (ii) contraction in EBIT margin by 2.1ppt to 19.0% from 21.1% in FY18 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 25.8% (FY18: 24.1%). It was unable to match last year grand sales due to weaker MLM sales attributed to cautious distributors spending, and tepid purchasing power that led to stagnant distributors’ growth.

QoQ, 4Q19 CNP plunged 22% mainly due to lower revenue (-19%) from lower sales of all division, MLM division (-16%), Wholesale (-26%) and Retail division (-24%). MLM division continued to hit by lower number of members’ recruitment/renewal, and further affected by weak responses to overseas incentive sales campaign. Retail division was also weak due to seasonally weak quarter post-CNY festivities. EBIT margin was slightly better by 0.1ppt to 19.4% from 19.3% in 3Q19 but negated by a higher effective tax rate at 29.1% (vs. 24.4% in 3Q19).

Outlook. We expect to see further pressure from stagnant distributors’ growth (average at 140k, plunging from the highest level in FY18 at 160k distributors) as well as from weakening MYR against RMB. The MLM division will develop more “small ticket” items with affordable prices to cater for market needs in view of lower spending power of its members and reinforcing the ongoing digitalization initiatives. The Wholesale division will focus on its core products, which include Chinese medicated tonic and other health and wellness products, and will continue to widen its product portfolio. The Retail division will strengthen its business collaboration with Chinese physicians to complement its business and will continue to develop more affordable house brand products to widen its product portfolio as well as improvement in its sales incentive scheme.

Cut FY20E CNP by 7%. We cut our FY20E CNP by 7% on the expectation of lower MLM distributors and average sales. We introduced FY21E CNP at RM48.3m.

As such, we also cut our target price to RM1.95, from RM2.10, based on an unchanged 12x FY20E EPS at its -0.5SD of 5-year forward historical mean. Reiterate UNDERPERFORM.

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

Source: Kenanga Research - 26 Jun 2019