SINGAPORE (Oct 23): RHB Research is starting coverage of Best World at “buy” as the group changes its business model in China from export to franchise model, giving it the ability to generate higher revenue and earnings for each product unit sold.
“We expect earnings to jump at a CAGR of 21% over the next three years, which deems the current 10x FY19F earnings valuation as very compelling,” says RHB analyst Juliana Cai.
Best World is also sitting on $87 million net cash and could maintain its historical dividend payout ratio of about 40%, which should bring FY19F dividend yield to 4%.
Best World sells premium skincare and supplements player in 12 countries. While it mainly distributes its products to consumers through direct-selling channels, it also sells products via franchisees in China and export agents in Myanmar. Therefore, the group is largely immune to labour and rental cost pressures and huge startup costs.
At end 2Q18, the group converted its export model in China into a franchise model. While retail prices for end customers remained unchanged, the new model allows Best World to sell its products at a higher price to franchisees versus prices charged to export agents, says Cai.
Given the increase in profitability of this new model, she expects 2H18 earnings to catch up when the franchise model commences operations. FY19 earnings is also expected to jump by 40%, largely from the full-year impact of this business model change and buoyant market demand.
“Initiate coverage with Street-high target price of $1.97, based on 13x FY19F earnings,” says Cai, “We expect EPS to grow at a CAGR of 21% over FY17-20F. The stock is trading at 10x FY19F P/E, a steep discount to other direct-selling peers (average: 16x) despite superior growth and margins.”
Year to date, shares in Best World are up 9.6% to $1.49.
