Esthetics’ 1HFY15  (Mar)  core  earnings  of  MYR9.3m  were  above  our expectations  due  to  a  favourable  tax  rate.  Core  PBT  of MYR11.5m was largely  in  line  at  53.8%  of  our  full-year  estimate.  Following  the  recent share  price  weakness,  we  upgrade  our  call  to  BUY  and  nudge  up  our SOP-based TP to MYR1.40 (from MYR1.35). This implies a 27.3% upside. Management declared its first interim DPS of 1.5 sen.  

Results  review.  Esthetics  International  Group’s  (Esthetics)  1HFY15 revenue  reached  MYR73.0m  (+2.0%  YoY),  driven  by  both  its  product distribution  arm  (+2.3%  YoY)  and  professional  services  (+1.8%  YoY). EBITDA  margin  improved  to  19.8%  (+340bps  YoY),  lifted  by  the standardisation  of  its  regional  pricing  policy  (implemented  in  1QFY15), while  its  in-house  Clinelle  brand  continued  to  show  positive improvements  vis-à-vis  loss-making  previously.  All  in,  core  PBT  of MYR11.5m  (+20.1%  YoY)  came  in  at  53.8%  of  our  full-year  estimate. Core  earnings,  however,  surged  28.0%  YoY  to  MYR9.3m  (at  57.4%  of our previous full-year forecast), owing to a lower-than-expected 2QFY15 tax rate of 16.3% due to overprovision in the previous quarters. 2QFY15 numbers were generally higher both YoY and QoQ.

Interim  DPS.  Management declared  its  first interim  DPS  of  1.5  sen, on par with 1HFY14 levels. This translates into a payout ratio of 30.2% vis-à-vis  32.5%  in  1HFY14.  Net  cash  pile  now  stands  at  MYR56.9m  or MYR0.31  per  share.  Moving  forward,  management  reaffirmed  its cautiously  optimistic  stance  as  rising  inflationary  pressure  upon implementation  of  the  goods  and  services  tax  (GST)  in  Apr  2015  could potentially  translate into slower  retail sales  given  that  the  group  derives 59% of its sales from Malaysia.     

Forecasts and risks. We upgrade our FY14F EPS by 5.6% to reflect a lower-than-expected  tax  rate  and  retain  our  FY15-16F  numbers.  Key risks  include  increased  competition  from  other  skincare  brands  and potential tightening in consumer spending due to higher cost of living. 

Upgrade  to  BUY.  We  revise  our  SOP-based  TP  to  MYR1.40  (from MYR1.35) after factoring in its latest net cash balance and our earnings revision. Following the recent retracement in share price, which leaves a 27.3%  upside,  we  upgrade  our  call  to  BUY  (from  Neutral).  The  stock could  potentially  make  its  return  to  the  Shariah  list  in  the  upcoming November  review  (last  inclusion  in  May  2013),  as  we  gather  that  the group  has  now  conformed  to  Shariah  requirements  by  redeploying  its cash into Islamic accounts. 

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

Esthetics  International  Group  is  the  exclusive  distributor  for  Dermalogica  skincare  products  in  Malaysia,  Indonesia,  Thailand,  Hong Kong,  Singapore,  Brunei,  Cambodia  and  Vietnam.  The  group  also  owns  and  operates  skincare  salons  and  retail  kiosks  in  Malaysia, Singapore, Hong Kong and Thailand.

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Source: RHB