• Maintain BUY with new MYR0.88 TP from MYR0.93, 49% upside and c.7% FY26F yield. DXN Holdings’ 1HFY25 (Feb) missed estimates due to higher- than-expected costs and unfavourable FX. That said, the strategies to deepen penetration in existing markets and new market expansion should continue to foster growth, supplemented by new product launches. Valuation remains attractive considering the effective business model, Brazil expansion as a medium-term growth driver, and sturdy balance sheet (1HFY25 net cash: MYR521m or 10.5 sen/share) to facilitate a generous dividend pay-out.

• DXN’s 1HFY25 results were below expectations. Core net profit of MYR148m (-14% YoY) met 39-40% of our and consensus’ forecasts due to higher-than-expected staff and shipping costs as well as unfavourable FX. Post results, we cut FY25-27F earnings by 13%, 6%, and 4%. Correspondingly, our DCF-derived TP drops to MYR0.88 (inclusive of a 2% ESG discount), which implies an unchanged 11x P/E FY26F. The valuation is below the consumer sector average, considering the highly regulated direct selling industry DXN is in.

• Results review. YoY, 1HFY25 revenue rose 9% to MYR964m thanks to the robust sales growth in key markets, including Peru and Bolivia. That said, 1HFY25 EBITDA only grew 3% to MYR277m as a result of higher staff costs (+24% YoY) to accommodate expansion plans and elevated shipping rates. QoQ, 2QFY25 revenue rose 3% to MYR488m, similarly underpinned by steady performance in the key markets. However, 2QFY25 core net profit dipped 19% to MYR66m due to the cost inflations and charging of FX losses amounting to MYR21m. 1HFY25 DPS was 1.7 sen vs 1HFY24: 1.7sen.

• Outlook. DXN’s earnings growth will be supported by the relentless growth momentum in major markets. Core strategies to recruit new members and enhance members’ productivity will continue to revolve around member engagements, complemented by quality of new product launches. Meanwhile, the recent capacity expansion should help capture the rising demand and roll out new product categories to broaden the addressable markets. In addition, the consequent efficiency gain, together with annual price adjustments, will sustain the high GPM of c.80% notwithstanding rising input and overhead costs. We also look forward to the results from the entry to Brazil, leveraging on DXN’s established existing network in the Latin American region. We expect significant earnings contribution from this venture in three to four years’ time.

• Risks to our recommendation include major delays in expansion plans and unfavourable regulatory changes.

Source: RHB Research - 25 Oct 2024