CONSUMER
DXN is an international multi-level marketing (MLM) company and it is well known for its Ganoderma / Lingzhi business. Most of its products are based on Ganoderma (a kind of mushroom famous for herbal medicine).
After meeting with management and analyzing DXN’s 1QFY11 results which showed RM10m in net profit, we are convinced that the company is likely to register record earnings and significantly cut its net debt, or possibly end up with net cash this year. The new strategies adopted by management in the last 18 months are starting to yield encouraging results from FY11. With a stronger free cash flow, DXN is expected to achieve a 40% dividend payout ratio and pay quarterly dividends. DXN, which has a relatively low capex MLM business selling somewhat recession-proof products (e.g. food & beverage, health food supplement, personal care), is currently trading at a 40% discount to the other MLM companies such as Zhulian and Hai-O. Its share price is now trading at its FY11 book value / share of RM0.91.
New strategy. In Nov 2009, DXN revised 3%-5% higher the selling prices of its major Ganoderma products, which could increase margins post 1QFY11 as it normally keeps 2 months’ worth of stocks. Operationally, DXN is making efforts to reduce its manufacturing costs (98% of MLM sales is from its own manufactured products), namely by lowering cost of key raw material such as coffee powder through bulk purchasing and increasing manufacturing automation. Most of its RM10m FY10 capex is for the automation initiative. Elsewhere, DXN has been reducing its net debt from RM79.5m in FY08 to RM37.5m as at 28 Feb 2010. It has just made early settlement of its RM50m collateralized loan obligation. Going forward, management will deploy its financial resources towards growing its Ganoderma core business, and not diversify into other businesses like in the past.