Review

• Beshom Holdings Bhd’s (Beshom) 1QFY23 core earnings of RM7.0mn  missed expectations, coming in at 17% of ours and 16% of consensus full-year estimates. The earnings miss was due to poorer-than-expected performance in the multi-level marketing (MLM) division.

• Revenue for 1QFY23 slid 1.8% YoY to RM48.3mn mainly due to poorer  sales in the MLM division. Gross margin dropped by 0.6%-pts YoY driven by higher product and logistic costs and the weakening of Ringgit.

• MLM. Revenue in 1QFY23 was adversely impacted by weak members’  sentiment and rising inflationary pressure, which affected members’  recruitment and renewal. Segmental profit plunged 56.4% YoY in 1QFY23  on the back of 28.6% YoY decline in the revenue. Sequentially, quarterly revenue dropped 1.5% QoQ while operating profit slumped 23.0% from preceding quarter due to higher marketing.

• Wholesale. The division’s revenue soared 57.3% YoY in 1QFY23 from depressed base a year earlier when business activities were restricted due to MCO. The division’s sales were also lifted by increased purchase by customers before price hike and higher sales in duty free shop after the reopening of international borders. Operating profit for the quarter quadrupled YoY on the back of revenue growth.

• Retail. 1QFY23 revenue surged 19.4% YoY due to low base effect a year earlier. Revenue growth and higher contribution from house brand products which carry higher margins led to a 39.4% YoY growth in the segmental EBIT.

Impact

• We cut our earnings forecast for FY23/FY24/FY25 by 18.7%/11.0%/9.9%  respectively, forecasting a lower distributor force of 65,000/70,000/73,500  as the MLM segment’s distributor plunged from 98,000 members in FY21  to 50,000 in FY22.

Outlook

• MLM. The division continues to face difficulty in recruiting and retaining new members. With the resumption of overseas incentive trip and step up in physical event, we believe the division should contribute more to the earnings in the coming quarters from increase in distributors and average revenue per distributor.

• Wholesale. As part of the increase in revenue was contributed by boost in sales prior to price hike, we reckon that the QoQ sales growth would normalise in the coming quarter. The group intends to roll out more FMCG  products in the Wholesale division to diversify its product portfolio, which should contribute positively to growth within the segment.

• Retail. The division is developing new house brands to increase its product mix and improve margin. Management expects positive results in the next quarter from its half yearly members’ sales campaign. We believe bulk of  the sales should most likely materialise in 3Q or 4Q boosted by Chinese  New Year sales.

Valuation

• We downgrade Beshom to Hold while lowering our target price to  RM1.46/share (previously RM1.85/share) based on 11x CY23 EPS  (previously 12x). We lower the PE valuation due to significant challenges in the MLM division, which usually is the main earnings contributor.

Source: TA Research - 30 Sept 2022