FY20 net profit of RM32.2m (-32%) came in above both our/consensus expectations at 115% of full-year estimate due to better-than-expected margin with cost optimisation leaning toward digitalisation. As such, we increased FY21E NP by 17% and introduce FY22E NP of RM37.7m (+6%), and upgrade our TP to RM1.20 (from RM0.850 previously), based on the revised 10x FY21E EPS. Nonetheless, we expect MLM distributors’ growth will continue to be capped by cautious consumer sentiment amidst the economic uncertainties. Maintain UP.

FY20 above expectations. FY20 net profit of RM32.2m (-32%) came in above both our/consensus expectations at 115% of full-year estimate due to better-than-expected margin with cost optimisation leaning toward digitalisation. A final interim DPS of 4.0 sen elevated FY20 DPS to 10.0 sen (FY19: 13.0 sen), within expectation.

YoY, FY20 net profit plunged 32% dragged by: (i) lower revenue (-22%) due to weaker MLM division (-30%), Wholesale (-3%) as well as Retail division (-10%), and (ii) contraction in EBIT margin by 2.9ppt to 16.1% from 19.0% in FY19 from unfavourable merchandise mix skewed towards small ticket items as well as higher rebates on promotional items to attract distributors. MLM division’s dismal performance continued to persist in view of weak market sentiment with distributors continuing to cut back spending and slowed down marketing activities, which affected members’ recruitment and renewal. Retail division’s buying momentum remained subdued but cushioned by better merchandise mix and cost optimization initiatives, while Wholesale division’s higher sales generated from Puer tea and the export of bird nest products cushioned the drop in Chinese medicated tonic and patented medicine sales.

QoQ, 4QFY20 net profit surged 26% mainly from: (i) expansion in EBIT margin by 4.1ppt to 20.2% from 16.1% in 3QFY20 with improved cost optimization measures especially toward digitalisation and absent of sales incentive campaign in light of the MCO, and (ii) lower effective tax rate of 14.7% (3QFY20: 28.0%) from reversal of tax overprovision. These more than offset the lower revenue (-20%) for all business segment. For MLM (-4%), negative impact of MCO period was cushioned by the aggressive expansion of e-commerce platform by encouraging distributors to shift to its online portal to reach out to its members with free membership and “Stay at home, earn from home” campaign. The retail segment (-48%) was hit hard by the MCO as its outlets operated at a minimal level during the 1

st phase of the MCO and only partially re-

opened from the 2nd phase with shorter operating hours.

Outlook. We expect to see slower distributors’ growth (averaging at 120k, plunging from the highest level in FY18 at 160k distributors) amidst the economic uncertainties. The MLM division will develop more “small ticket” items with affordable prices to cater for market needs and reinforce on-going digitalization initiatives. The Wholesale and Retail divisions will focus on its core products, and will continue to widen product portfolio. Moving forward, the group will continue to optimise costs, re-strategize business plans, and further strengthen existing digital infrastructure, enhancing presence in social media and digital advertising.

Increase FY21E NP by 17% and we introduce FY22E NP of RM37.7m (+6%) to account for better margin with the cost optimization strategy leaning toward digitalization.

Maintain UNDERPERFORM but with a higher TP of RM1.20 (from RM0.850 previously) based on higher PER of 10x (at its -1.0SD of 5-year forward historical mean) from PER of 8x (at its -2.0SD) on FY21 EPS.

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

Source: Kenanga Research - 30 Jun 2020