Excerpts from RHB Research report

Analyst: Juliana Cai

Maintain BUY with higher TP of SGD2.95 from SGD2.13, 15% upside and 3% FY19F yield.

Best World’s 4Q18 results beat our as well as consensus’ estimate. For the full year, core PATMI grew 15% YoY to SGD63.9m.

Best World

Share price: 
$2.33

Target: 
$2.95

♦ 4Q18 results were above expectations. Sales from all markets came in above our expectations, while the franchise business model in China achieved stronger margins.

During the briefing, management said it still expects 50% YoY growth in end-consumer demand for the China market. As such, we remain confident of its growth prospects in the near term.

We raise our FY19F-21F earnings by 8-14% on the back of higher revenue and margin assumptions.


♦ Share price has been on a rollercoaster ride in the last month. Overexuberance in the market resulted in its share price soaring 24% in the first two weeks of February over no apparent news, before collapsing on concerns raised in the Business Times article, Sales of DR's Secret in China: Best World's best-kept secret?.

HuangBanChin8.18Huang Ban Chin, Chief Operating Officer, Best World. File photo.We note that Best World has issued a statement to clarify the issues raised. It is also looking to engage an independent review to address the relevant concerns.

We believe the move towards greater transparency will build greater confidence among the investment community.

♦ Going back to fundamentals. Since the share price has now retraced to a more reasonable level, we see value emerging, given the strong growth prospects in its China franchise business.

We raised our TP to SGD2.95 on the back of stronger earnings growth as well as a higher target P/E multiple of 18x in our blended valuation methodology to reflect increased clarity in the franchise business’ margins.

♦ Stay safe, stick to fundamentals. While we are confident of the near-term earnings prospects, we caveat investors to avoid chasing share price when valuation runs way too high.

Unlike a usual retail business, Best World’s direct selling model and franchise model operate largely by “social selling”.

This business model itself innately has limited visibility in end-consumer demand.

Key risks include overstocking of inventories by franchisees and inability to track sudden drop in end-consumer demand.

Valuation

JulianaCai"We raised our TP to SGD2.95 on the back of stronger earnings growth as well as a higher target P/E multiple of 18x in our blended valuation methodology to reflect increased clarity in the franchise business’ margins."

-- Juliana Cai (photo)
Analyst, RHB Research

We raised our TP to SGD2.95 based on our blended valuation methodology.

As highlighted in our initiation report Best World : Put Your Skin In The Best Game; Initiate BUY (23 Oct 2018), we think its share price is likely to re-rate upon more clarity about its earnings prowess in China following 3Q18 and 4Q18 results.

Our TP is now based on the average of 18x target P/E and DCF valuation.

Our 18x target P/E is based on peer average and is also in line with Best World’s 5-year average P/E.

Our WACC assumption for DCF valuation also includes additional country risk premium to account for its exposure to the China market.

Our new TP implies 15% upside from current levels.

Full report here


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