Esthetics’ MYR3.9m 1QFY15 core earnings were below our expectations at  21.3%  of  our  full-year  estimates.  We  attribute  this  to  slower-thanexpected  sales  for  its  corporate  salons  and  product  distribution  arm. Management  conceded  that  tightening  consumer  spending  and escalated  competition  could  translate  into  potential  earnings headwinds ahead. Cut to NEUTRAL, with FV of MYR1.35 (vs MYR1.72).

Results  review.  Esthetics  International  (Esthetics)’s  1QFY15  revenue registered  MYR35.1m  (+3.3%  y-o-y,  +4.3%  q-o-q)  as  growth  under  its product distribution arm (+7.1% y-o-y, +15.8% q-o-q) was partly offset by flattish  numbers  registered  under  its  corporate  salons  (+0.4%  y -o-y,  -3.3%  q-o-q).  Overall  EBITDA  margin,  however,  improved  to  18.5% (+170bps  y-o-y,  +280bps  q-o-q)  as  its  Clinelle  brand  under  its  fast moving consumer goods  (FMCG)  segment closed at  a  breakeven level vis-à-vis  loss-making  previously.  All  in,  1QFY15  core  earnings  grew 18.2% y-o-y and 103.7% q-o-q to close at MYR3.9m, but still fell short of our expectations at 21.3% of our full-year estimate.

Key  highlights.  We  note  that  regional  pricing  standardisation  for  its products  was  implemented  in  this  quarter.  This  would  help  to  remove pricing  discrepancy  to  better  appeal to its  customers.  Looking  forward, management  guided  that  tightening  consumer  spending,  coupled  with escalated competition within the retail  skincare  space, could  potentially translate into earnings volatility ahead.  We do not discount the possibility of  management  scaling  back  its  initial  expansion  plan  of  growing  its presence to 100 outlets over the next 3-5 years (from 72 currently).  

Forecasts  and risks.  We cut  our  FY15-16  earnings  forecasts  by  11.3-16.2%  in view of management’s guidance of  a  cautious outlook ahead. We also take the opportunity to introduce our FY17 estimates.  Key risksinclude increased competition from other skincare brands and  potential tightening in consumer spending due to higher cost  of living.  

Downgrade to NEUTRAL.  Although we continue to like  Esthetics  for its established  partnership  with  the  reputable  Dermalogica  brand,  we  are turning cautious in view of the results disappointment. Hence, we reduce our  call  to  NEUTRAL  (from  Buy)  with  our  FV  now  lower  at  MYR1.35(from  MYR1.72).  This is  following  our  earnings revision  as well  as  ourtaking  into account  Esthetics’  fully enlarged share base of 237.6m  after factoring in full warrants conversion.

Source: RHB