SINGAPORE (May 15): DBS Group Research is downgrading Best World International to “fully valued” after slashing its FY18F earnings projections by 18% to account for slower growth in China and weakness in Taiwan.
In 1Q18, Best World’s revenue and earnings declined sharply by 43% y-o-y and 41% to $25.4 million and $5.7 million, respectively. This follows the recognition of higher upfront sales in 4Q17 as Best World prepared for its transition from an “export model” to a new “China wholesale” model which is equivalent to the Direct Selling model for China.
See: Best World posts 40.6% drop in 1Q earnings to $5.8 mil on conversion from export to China wholesale
To recap, Best World sold 5-6 months’ worth of inventory via exports into China in 4Q17 as it prepared against possible delays from the planned transfer of import licences from its third-party agent to Best World’s subsidiary in Zhejiang. The higher upfront sales resulted in record revenues and profits in 4Q17, but at the expense of lower export revenues and profitability in 1Q18.
In a Tuesday report, analyst Carmen Tay says while the weaker 1Q18 was largely anticipated, the adoption of a more cautious tone on FY18F growth prospects -- particularly for the China wholesale business -- came as a “surprise”, which suggests that the company may likely fall short of consensus’ expectations of 20% bottom-line expansion in FY18F.
And although Best World’s worldwide membership pool continued to grow sequentially to a record 500,259 members as at end 1Q18, Tay remains concerned over the lower retention rate of members in Taiwan, saying it’s “a worrying trend which could continue to impact performance over the next few quarters”.
After imputing the lower revenue growth assumptions, DBS has cut FY18F/19F earnings by 18%/15%, respectively. The research house has also applied a lower valuation multiple of 15 times -- larger discount to larger peers’ of 21 times -- to reflect the lower FY18F earnings, resulting in a lower target price of $1.29.
As at 12.44pm, shares in Best World are down 13 cents at $1.32 or 15.3 times FY18 forecast earnings.
