We initiate coverage on EIG with a BUY recommendation and MYR1.78 FV. We expect the group to register FY14F-16F core earnings of MYR15.8-21.7m, implying a 3-year CAGR of 11.2%. We like EIG for its: i) established partnership with the reputable Dermalogica skin care group, ii) committed family-led management, and iii) decent earnings growth supported by a sturdy balance sheet.
A thing of beauty is a joy forever
Wellness and beauty. EIG has been involved in the wellness, skin care and beauty industry for >29 years. The group, which now has a presence in Asean and Hong Kong, was listed on the Main Board of Bursa Malaysia on 11 Mar ch 2004 with an initial market capitalisation of MYR160m. Today, EIG has two main business segments, namely: i) distributing professional skin care products to independent salons – together with a sub-segment for fast moving consumer goods (FMCG), and ii) operating its own chain of beauty and skin care salons.
Brief history. EIG has its roots as a skin care centre operating at Plaza Imbi in Kuala Lumpur in 1984. In 1989, the group secured its first exclusive distributorship of Dermalogica Inc’s skin care products in Malaysia, and was subsequently granted the distribution rights for the Asean region. In 1992, EIG set up its first professional skin care centre, ie Leonard Drake Professional Skin Care, in Bangsar, Kuala Lumpur. By 2000, the group had embarked on its first overseas venture by setting up operations in Hong Kong to tap into Southern China’s competitive but rapidly growing skin care and cosmetics market.
Changing of the guard. After a string of disappointing annual results in FY10-11, a strategic change of leadership was initiated in Aug 2010 by the Chieng family via the family-owned Providence Capital SB vehicle. Today, the Chieng family holds an effective 60.9% stake in EIG (2010: 10.0%). Since the family took the helm, the group has undertaken a review of its product portfolio and discontinued several loss-making segments as well as terminated the distribution of non-core and third party cosmetics brands.
All in the family. Management is currently led by executive chairman Eddy Chieng, who was the founder of Nationwide Express Courier (NAT MK, NR) and was responsible for bringing FedEx (FDX US, NR) to Malaysia. He is currently assisted by his sons – group MD and CEO Roderick Chieng (a former investment banker with Macquarie Group Australia) and non-executive non-independent director Brian Chieng, also an ex-investment banker. EIG’s headquarters in Bukit Jelutong, Shah Alam, is equipped with facilities to train its own professional skin care therapists.
Flagship brand. The group’s jewel in the crown is its exclusive distributorship of Dermalogica’s skin care products in nine countries, namely: i) Malaysia, ii) Thailand, iii) Singapore, iv) Indonesia, v) Vietnam, vi) Brunei, vii) Cambodia, viii) Hong Kong,and ix) the Philippines. Apart from that, EIG is also the exclusive supplier of Dermalogica products to Vietnam and Cambodia. Dermalogica is one of the world’s leading skin care brands and was founded in 1986 in the US. There are now >100,000 licensed Dermalogica skin therapists worldwide and the brand can be found in >28,000 salons and spas in >80 countries. We estimate that Dermalogicarelated sales make up about >75% of EIG’s annual sales currently.
Extension of distributorship. In 2012, EIG’s exclusive distributorship of Dermalogica Inc’s products to Asean and Hong Kong – which was due to expire in Aug 2013 – was given an early two-year extension by the ultimate brand owner, Dermalogica, Inc. The existing distributorship will now end by 31 Dec 2015, with an option to renew for another five-year period. Looking at the group’s successful turnaround since the Chieng family took over the helm in 2010, we are confident that EIG will be granted another extension come end-2015.
Other premium brands. To diversify its brand offerings, EIG has – in recent times –added other brands such as Davines and Tisserand under its umbrella. In 2012, the group acquired the exclusive distributorship for the latter, an aromatherapy and
beauty products brand, for 10 countries: i) Malaysia, ii) Singapore, iii) Thailand, iv) Brunei, v) Indonesia, vi) the Philippines, vii) Vietnam, viii) Cambodia, ix) Myanmar,and x) Hong Kong for a 10-year period with the option to renew for another 10. Subsequently in 2013, EIG signed a distribution agreement with Davines SPA for the exclusive rights to distribute Davines hair care products in Malaysia, Singapore, Thailand and Brunei for a 10-year period with the option to renew for another 10 years at the end of the initial agreement. Although the contributions from these two brands to EIG’s topline are relatively insignificant vis-à-vis Dermalogica – at an estimated <10% of group sales – we believe the addition of these two premium brands to its current stable will enable the group to diversify its product s portfolio and reduce its dependence on Dermalogica over the long-run.
Product distribution network. EIG has an extensive distribution network of >1,000 independent professional salons across Asean and Hong Kong. In FY13, the product distribution segment as a whole contributed MYR60.5m, or 45% of group revenue, and MYR8.4m in PBT. This makes this division EIG’s most profitable in terms of margins. For 1H14, this segment recorded revenue of MYR30.5m (+8.2% y-o-y), primarily on higher sales in its core markets in Malaysia and Hong Kong. Moving forward, we expect the revenue generated from this business to grow at 10% each year, driven by the addition of new premium brands and increased penetration in the regional markets in which it operates.
Establishing a presence in FMCG segment. EIG has also moved into the FMCG business through its wholly-owned skin care brand, Clinelle. Parked as a subsegment to its distribution arm, Clinelle is sold to pharmacies and high traffic outlets like Guardian, Watsons and SaSa throughout Malaysia and Hong Kong. In FY13, this sub-segment accounted for 27% of the distribution arm’s segmental income, but registered a MYR4.2m pre-tax loss due to the lack of economies of scale. The losses, however, have narrowed from FY12’s MYR7.0m, mainly due to improved cost control and inventory management. Based on this improving trend, we expect EIG’s FMCG arm to break even by FY15F
Pamper me fabulous. Under EIG’s corporate salon division, the group currently owns 52 AsterSpring skin care salons and 18 Dermalogica retail kiosks. It has 28 AsterSpring skin care salons in Malaysia, 14 in Singapore, three in Hong Kong and seven in Thailand. Starting off as the Leonard Drake Skin Care Health Spa, AsterSpring is now a premier skin care and beauty salon provider located mostly in premier shopping outlets. On the other hand, EIG’s consultation pods cum retail kiosks are manned by trained Dermalogica skin therapists whose role it is to advise and recommend Dermalogica products to customers. Currently there are six consultation pods in Malaysia, eight in Thailand, and three in Hong Kong. In FY13, the corporate salons division contributed MYR74.8m, or 56% of the total revenue, up 4.3% y-o-y. This segment reported a higher PBT of MYR3.0m (FY12: MYR1.3m), driven mainly by openings of new salons and retail kiosks. Moving forward, EIG is looking to expand its footprint and increase the number of AsterSpring salons and Dermalogica consultation pods to 100 outlets from 70 regionally throughout the region over the next 3-5 years. In addition, management is also looking to penetrate into newer markets in the region. EIG recently received approval to incorporate a distribution company in Indonesia and will be looking to set up operations there subsequently.
A quick check. We recently visited an AsterSpring salon at the Suria KLCC mall to take a look at the services and treatments provided by the salon. Facial treatments usually last around 30 minutes, while certain body treatments can last up to 80 minutes. The complete range of facial and body treatment provided by the salon was priced between the MYR80–260 range, which we deem affordable considering the premium location. Body treatments are only available for female customers while facials are offered to both genders. AsterSpring salons operate on an appointment basis, with four sessions available in a day. Walk-ins are possible, provided the therapists are available at a particular time. Aromatherapy products from Tisserand and body care products from Davines are available for sale off-the-shelf. We also visited a Dermalogica consultation pod in the same shopping mall. The kiosk is located in a very high foot traffic area and a skin consultation only takes about five
minutes, after which the Dermalogica products suitable for the customer’s skin condition is then recommended.
Source: RHB
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