We hosted Esthetics International Group (EIG) at our Asean CorporateDay in Kuala Lumpur and Singapore. Both sessions were well-attended,with investors focusing on its near-term expansion plans and potentialregional opportunities ahead. Management also indicated thepossibility of increasing its dividend payout ratio gradually going forward to better reward shareholders. Maintain BUY and MYR1.72 FV.

• Target 100 outlets. EIG now owns 55 corporate salons and 17 retail kiosks in four core markets, ie Malaysia, Singapore, Hong Kong and Thailand. Management intends to grow its presence to 100 outlets over the next 3-5 years. This will likely involve penetrating into new regional markets, with its first corporate salon to be set up in Indonesia by 1QCY15. Although near-term earnings accretion would not besignificant, we are positive on management’s move to tap into new regional opportunities by leveraging on Dermalogica’s well-established branding.
• Capex taken care of. Initial set-up costs typically hover around MYR800k-MYR1m per outlet across all regions. Management guided that new outlets typically take about 12 months to break even operationally. Cash flow breakeven, however, could be shorter at 8-9 months, given that its customers typically sign up for 12-month packages. Over the next 6-12 months, management is looking to set up its corporate offices in Thailand and Indonesia by potentially acquiring office units. Its capex requirements would likely be funded internally given its net cash pile of MYR53.8m as of March 2014, coupled with its annual operating cash flow of MYR20m-30m.
• DPS to potentially increase. Although there is no fixed dividend policy at this juncture, management is adamant to gradually increase its payout over the medium term in view of the successful turnaround of its operations over the last three years. We are forecasting for FY15F-16F yields of 3.2-4.0%, pegged to a reasonable 40% payout ratio.
• Maintain BUY. All in, we reiterate our BUY call, with our SOP-based FV unchanged at MYR1.72, as we continue to like EIG for its: i) establishedpartnership with the reputable Dermalogica skin care group, ii) committed family-led management, and iii) decent earnings growth supported by a sturdy balance sheet.

Source: RHB