Transition period a short-term drag on Zhulian’s earnings: Kenanga

PETALING JAYA: Zhulian Corp Bhd’s earnings are expected to be dragged down by the transition period in the short term, as the group embarks on its plan to attract more distributors, said Kenanga Research.

“Moving forward, the group is aiming to attract more distributors, particularly young entrepreneurs who are looking for low entry-cost ventures by adopting the ‘small ticket items’ strategy. Although the strategy may be able to attract higher core distributor force in the long run, we foresee earnings to be dragged down by the transition period in short-term, based on the experience of another local multi-level marketing player,” it said in its research note.

“All in, we maintain our cautious stance on the company in view of the tough operating environment in Malaysia as consumer sentiment succumbed to a sixyear low in 1Q15 (first quarter ended Feb 28, 2015). With the Goods and Services Tax (GST) being implemented in 2Q15 (second quarter ended May 31, 2015), we do not expect the sentiment to recover quickly. Meanwhile, the Thailand market is still weak judging from the lacklustre contributions from associates,” it said.

Zhulian’s net profit of RM23.7 million for the six months ended May 31, 2015 (1H15) was 7% lower year-onyear but within expectation, accounting for 45.1% of Kenanga’s full-year forecast.

“The group has proposed dividend of 1.5 sen per share, bringing year-to-date dividend per share (DPS) to 3 sen, which is below our expectation of 10 sen in FY15 due to the lowerthan-expected payout ratio,” said Kenanga.

It revised down its DPS forecast from 10 sen for both FY15E and FY16E to 7 sen and 7.5 sen respectively by assuming core conservative payout ratio of about 60% to be in line with the year-to-date payout trend.

Zhulian’s 1H15 revenue fell 16.2% to RM110.5 million due to the lower sales in the local market on the back of persistent weak consumer sentiment while operating profit grew 14.2% despite the lower revenue as 1H14 was dragged down by higher expenses incurred in marketing plans and higher start-up costs in its Myanmar operations.

Pre-tax profit declined marginally by 0.6% to RM31.9 million due to the lower contribution from Thai associates but net profit fell by 7% due to the higher effective tax rate of 25.8% versus 20.7%.

In 2Q15, revenue was flattish at RM55.3 million while operating profit fell marginally by 1.3% to RM10.1 million. However, contribution from associates slumped by 34.6% to RM4.6 million due to weak market conditions in Thailand, bringing net profit down by 11.5% to RM11.1 million.

Kenanga maintained its “underperform” rating and RM2 target price on the stock with no changes to its earnings forecast.