Review

• Beshom Holdings Bhd’s (Beshom) 9MFY23 core earnings of RM12.0mn  came in below expectations at 41% of our and 46% of consensus’ full-year forecasts. The earnings disappointment was largely attributed to the weaker-than-expected result in the multi-level marketing (MLM) division.

• Revenue for 9MFY23 slid 17.7% YoY to RM135.2mn on the back of poorer sales and higher marketing costs in the MLM division. Consequently,  adjusted PBT plunged 43.2% YoY to RM17.5mn.

• MLM. The higher marketing costs failed to revive spending as purchasing power continued to be weak driven by inflationary pressure. Consequently,  3QFY23 segmental revenue and EBIT tumbled 52.6% YoY and 94.9% YoY to RM13.3mn and RM0.2mn respectively. EBIT margin dropped 13.4%-pts  YoY to 1.6% due to poorer sales and higher promotional costs.

• Wholesale. Quarterly revenue fell 10.6% YoY to RM15.4mn attributed to reduced contribution from premium patented medicine. Driven by lower revenue and higher advertising costs, the segment registered a 52.5% YoY decline in EBIT to RM1.9mn.

• Retail. 3QFY23 revenue decreased 1.8% YoY to RM12.9mn due to lower  demand. As a result of higher marketing costs, higher rental expense and electricity tariff hike, EBIT margin was down 4.2%-pts YoY, leading to a  28.0% YoY drop in EBIT. However, on a QoQ basis, divisional revenue and  EBIT improved 35.3% and 81.7% respectively supported by Chinese New  Year (CNY) festive sales.

Impact

• We cut our earnings forecasts for FY23/FY24/FY25 by 40.0%/32.4%/24.7%  respectively, forecasting a lower distributor force for the MLM division.

Outlook

• MLM. The division would continue facing the challenging outlook due to inflationary pressure and anticipated increase in borrowing costs. As  Beshom continues to step up incentives for its distributors, we expect a  gradual recovery in sales for the segment in coming quarters. Overall profitability would unlikely improve until significant recovery in MLM division as the segment usually contributes to more than half of its EBIT.

• Wholesale. We anticipate QoQ sales growth to continue in 4QFY23 as  Beshom taps into wider customer base by entering the modern trade channels and pharmacy chain stores.

• Retail. Retail division’s sales are expected to normalise in 4QFY23  following boost in sales in 3QFY23 supported by CNY sales. Additionally,  we expect margin compression for the segment from increasing operating expenses (electricity tariff hike, maximum working hours).

Valuation

• We roll forward our base year. Maintain Sell with a lower target price of RM1.11/share (previously RM1.28/share) based on 11x CY24 EPS.

Source: TA Research - 28 Mar 2023