BEST WORLD: "Highly scalable model with 68% profit CAGR over FY15-18F"

Excerpts from DBS Vickers' report

Analyst: Paul Yong, CFA

Singapore-based direct seller enjoying great success in Taiwan. Best World’s flagship DR’s Secret range of premium skincare, which represents nearly 70% of the group’s sales, has been immensely successful in Taiwan.  Target  price 2016F net profit 2016F dividend* DBS Vickers $2.36 $29.8 m 4.72 c CLSA $2.50 $31 m 4.7 c Maybank Kim Eng $2.11 $29 m 3.75 c CIMB $2.21 $30.25 m 3.6 c * Includes 2 cent interim dividend paid prior to a bonus share issue. NextInsight compilation Currently Best World’s largest market by revenue, operations in Taiwan have already achieved a decent scale but still hold more potential.  Looking ahead, strong earnings momentum will likely be sustained by further cultivation of existing networks in its stronghold in Central and Southern Taiwan, and plans to leapfrog into the Northern region.

♦ Attainment of a direct selling licence in China, a market over 50x larger than Taiwan, should underpin years of firm growth. Best World hopes to emulate its success in China, where the cosmetics sector is forecasted to grow at 12.9% CAGR into 2019.

"Riding on highly scalable model to deliver 68% PATMI CAGR over FY15-18F.  Compared to traditional retailers, Best World’s advantage lies in its highly scalable model (with lower fixed costs). Supported by greater scale economies, we project PATMI to rise quickly from S$10.1m in FY15 to S$48m by FY18F as the group further extends its reach in its key markets of Taiwan and China." -- Paul Yong, CFA (photo)

With much of the groundwork already laid in the PRC, MOFCOM’s indirect endorsement through the recent award of its rare direct selling licence provides Best World with the credibility and platform needed to gain scale in the world’s most populous nation and second-largest direct selling market.

Stronger participation rates at Best World’s post-licence recruitment events also confirm this.

Dora Hoan, co-chairwoman of Best World. Photo: Facebook.Valuation:
♦ Initiate with BUY; TP of S$2.36 is based on 16x FY17F PE. As Best World enters into a period of firm growth, we opine that it should trade at 16x FY17F earnings (at a smaller discount to global peers’ 19x).

In addition, Best World’s PEG ratio of 0.4 is among the lowest in its peer group, which provides further upside.

♦ Key Risks to Our View:
Key risks include lack of control over individual distributors’ selling process and impact of unanticipated changes in local regulations and restrictions.

Full 26-page report here.