• Initiate BUY and MYR0.93 TP (DCF), 29% upside and c.5% FY24F (Feb) yield. DXN’s current valuation is attractive, considering its solid growth prospects underpinned by new market expansions. The superior profit margins and ROE are strong testament to its entrenched fundamentals and well-crafted business model. This entails an extensive portfolio of popular health- and wellness-oriented consumer products, complemented by an integrated upstream set-up and expansive global distribution network. Our TP implies 14x P/E FY24F, ie below the sector average.

• Healthy and fast-moving products portfolio. Building on its initial expertise in Ganoderma, DXN has expanded its product offerings to a diversified portfolio of health and wellness consumer products across a range of natural health ingredients, which include Ganoderma, Spirulina, and Cordyceps, among others. These products are believed to be able to improve body and immune functions – hence, they have been well received by the markets. Meanwhile, >60% of DXN’s sales are derived from fortified F&B (FFB) products, which are fast-moving consumer goods (FMCG).

• Integrated production facilities. The bulk of DXN’s products are produced internally by its integrated production facilities, including two R&D centres, seven cultivation facilities, and 12 manufacturing plants. The facilities have been instrumental in supplying a stable and differentiated source of products to meet growing demand. They also allow DXN to maintain strict quality and cost controls standards. Consequently, the group has gained multiple recognitions for its execution and production processes whilst sustaining consistently high GPMs at >80% in FY21-23.

• Nimble direct selling strategy. DXN distributes its products via a direct selling model – essentially an asset-light approach that requires minimal capex and recurring expenses for market expansion. Additionally, its One World One Market is a standardised and flexible compensation plan to primarily reward sales with zero upfront or annual fees charged to members. Consequently, it is able to expand quickly into new markets and grown the number of DXN members at a 3-year CAGR of 15.4%.

• Multiple growth strategies. To sustain the robust earnings growth momentum, DXN has set its sights on expanding into new markets – including Argentina, Brazil, Niger, Algeria, and Ghana – in stages. Capacity expansion is ongoing to support the ensuing increase in demand. On top of that, we believe product innovation and technology enhancement will remain the other key imperatives for DXN moving forward. Key risks include major delays in expansion plans and unfavourable regulatory changes.

• ESG. Derived using our proprietary ESG assessment, DXN has a 2.9 ESG score. From this we apply a 2% discount to reach our TP.

Source: RHB Research - 17 Jul 2023