Best World posts 29% higher Q4 net profit on transition to franchise model

BEST World reported late on Tuesday a 28.9 per cent rise in net profit for its fourth quarter from a year ago, on a surge in revenue and higher gross margins.

The stronger results come amid what it cites as a transition from an export model to a franchise model in its China market.

Net profit for three months ended Dec 31, 2018 stood at S$28.1 million, compared to a net profit of S$21.8 million.

The results translate to earnings per share of 5.12 Singapore cents, against earnings per share of 3.96 Singapore cents.

Revenue jumped 78.6 per cent to S$127.7 million. It said 61.7 per cent of its revenue comes from its franchise segment, with another 37.2 per cent coming from its direct-selling model.

Its gross profit alone more than doubled to S$99.77 million, reflecting a gross profit margin of 78.2 per cent. This gross profit margin improved by 11.5 percentage points, with the group saying on Tuesday that it expects gross profit margin to "normalise" between 75 per cent and 80 per cent. 

To be clear, the net profit margin for the fourth quarter fell to 22 per cent. This is because its distribution costs jumped to S$40.8 million in the fourth quarter, compared to S$13.6 million a year ago, on "sales-related expense from the franchise segment, commissions under the direct-selling segment, and higher convention expenses". 

The board has proposed a final dividend of 4.2 Singapore cents per share, as well as a special dividend of 0.8 Singapore cent per share. In the year-ago quarter, Best World offered a final dividend of 2.6 cents per share. 

Best World's rapid expansion in China had underpinned its high valuations, The Business Times (BT) reported. 

The direct-selling company, which also sells premium skincare products to franchisees in China, said over the weekend that it will order an independent review of its business and accounting practices, after BT raised questions about the lack of clarity on how its franchisees operate in China. 

Best World said the findings from the independent review will be published and reported to its audit committee, as well as to the Singapore Exchange RegCo. 

Best World said it has conducted its business ethically and in compliance with applicable laws, but "is not responsible for the accounting and sales records of the franchisees, who are independent third parties".

According to a BT report, Best World shares had been rallying on strong growth in China. Revenue is booked when the franchisees in China purchase inventory from Best World. But BT reported that at least one analyst has pointed to challenges reconciling between upfront sales figures and underlying consumer demand in China.

Separately, the company's auditors, Ernst & Young, have laid out an audit plan for the group's financial statements for the year ended Dec 31, 2018, which will include reviewing samples of revenue contracts and reviewing relationships with customers for evidence of related party sales, BT reported.

In China, where the franchise model has been adopted since the second quarter of 2018, "EY will also consider conducting site visits at BWL Lifestyle Centers operated by franchisees on a sample basis, and will request confirmations from franchisees on sales transactions with the group", the group had said.

Shares of Best World closed on Tuesday at S$2.53, up 32 Singapore cents.