Hot stock: RHB initiates coverage on Best World with 'buy', S$1.97 target price

BROKER RHB Research has initiated coverage with a "buy" call on premium skincare and supplements distributor Best World, with a target price of S$1.97.

The stock was up 3.36 per cent, or five Singapore cents to S$1.54 as at 11.18am on Tuesday.

"Best World is one of the few local consumer firms that have successfully penetrated the Chinese market. As the group transited into a new business model in China at end-Q2 2018, it is now able to generate higher revenue and earnings for each product unit sold there," RHB said in a research note on Tuesday.

"We expect earnings to jump at a CAGR (compound annual growth rate) of 21 per cent over the next three years, which deems the current 10x FY2019F P/E (price to earnings) valuation as very compelling," the brokerage added.

While Best World mainly distributes products to consumers through direct-selling channels, it also sells products via franchisees in China and export agents in Myanmar, RHB noted.

That makes the group largely immune to labour and rental cost pressures, the broker wrote, allowing Best World to scale its business or expand to new markets without incurring huge capex (capital expenditure) or major startup or fixed costs.

Best World's S$87 million net cash means it could also comfortably maintain its historical dividend payout ratio of around 40 per cent, which RHB said should bring the fiscal 2019 dividend yield to 4 per cent.

Despite the weakness in the firm's H1 2018 earnings due to the change in business model, RHB said that given the increase in profitability of this new model, it expects Best World's H2 2018 earnings to catch up when the franchise model commences operations.

Key risks to the stock included regulatory changes, reputational risks, and lack of visibility in inventory management, said RHB.