As the most successful investor of our time Warren Buffett once said, “You only find out who is swimming naked when the tide goes out.”
What the Oracle of Omaha meant was that when market conditions are easy and favourable, businesses thrive and stock markets rise. However, when goldilocks conditions eventually begin to wane, investors would then see which companies truly possess great business models – one that would withstand tough times.
The sell-offs in October and November coincided with the 3Q18 earnings season. Notwithstanding the slew of earnings news, investors also had to contend with the prospects of higher interest rates and uncertainties over US-China trade war.
With investors turning increasingly risk averse, the tide goes out, leaving only a couple of local stocks still buoyant. Amongst them, Best World International (Best World) was one the best outperformers over the past two months and in 2018.
At Shares Investment, we have been recommending Best World since February 2017, prior to its 2-for-1 stock split at the end of May 2017. The stock was trading at about $0.80 (after adjusting for the split) back then and has since rose to $2.24 as at 26 November 2018. Over the past two months itself, Best World clocked a 48 percent gain, while the local barometer Straits Times Index fell 5.5 percent.
We reviewed Best World’s latest 3Q18 results to offer some clues as to why the stock managed to buck the market sell-off and rise against the tide.
Initial Lack Of Faith
In part, Best World also suffered from bloodletting during April 2018 to August 2018. News of crackdown in Pyramid Selling and Ponzi scheme companies in China saw investors taking money off Best World due to the lack of understanding of the company. For one, Best World is a licensed direct selling company that does not flout China’s regulations.
When Best World posted a poor financial performance in 1H18, many investors viewed it as an ominous sign that the company was indeed troubled. In 1H18, Best World’s revenue plunged 39.6 percent to $44.3 million while net profit fell 31.3 percent to $14.9 million. However, as the company tried to explain – to no avail – that the ‘poor” results were due to the transition of its China’s business from an export model to a franchise model. As a result, export revenue derived from China was mostly excluded and revenue recognition from the franchise model was delayed till 2H18.
The growth indeed materialised in 3Q18 when the company reported revenue growth of 96.8 percent to $92.1 million compared to $46.8 million a year ago. The surge in revenue also translated to growth in the bottom line as Best World’s earnings shot up 145.3 percent to $29.9 million during the quarter. Overall, third quarter earnings singlehandedly propelled Best World back onto growth trajectory this year.
For 9M18, Best World’s revenue grew 3.8 percent to $152.5 million. Gross profit rose 18.8 percent to $121.5 million while net profit was up 33.2 percent to $44.8 million. These figures translate to gross profit margin of 80 percent and net profit margin of 29.4 percent, showing significant expansion compared to 70 percent and 23 percent respectively a year ago.
Balance-sheet wise, Best World has been paring down its debt from $7.4 million to $2.7 million. Meanwhile, its cash assets jumped from $82.2 million to $134.2 million. This translates to a net cash position of $131.5 million and a negligible total debt-to-equity ratio of just two percent.
Naturally, with growth reigniting and its pristine balance sheet intact amidst the rising interest rate environment, investors quickly recognised that Best World is still a remarkable stock to behold.
A Dividend Growth Stock
Source: Singapore Exchange
For investors, Best World has proven that it is not just a growth company but one that rewards shareholders with growing dividends as well. Over the past four years, dividend per share (DPS) has multiplied from $0.003 in FY14 to $0.041 in FY17. For 9M18, the company has already declared DPS of $0.024. Likely, with its remarkable results in in 9M18, total DPS for FY18 would also eclipse that of FY17 to mark the fifth straight year Best World has raised it DPS.
Based on the latest 12-months (LTM) period ending September 2018, Best World dished out DPS of $0.038 which works out to be a yield of 1.7 percent at current prices, noting that the current yield is not an important metric for dividend growth stocks.
Notwithstanding that, at current level, Best World’s payout ratio works out to be just 31.4 percent, suggesting significant headroom for dividends to be raised in the future.
Growth At Reasonable Price
Another reason why Best World is still an attractive investment is that the stock continues to be trading at a reasonable valuation. At the current price of $2.24, Best World is changing hands at a price-to-earnings (P/E) multiple of only 18.5 times. In retrospect, Best World’s P/E in February 2017 was just a hair length away at 16.3 times.
That said, the company is now trading at cum-dividend share price. Investors wanting to take a ride on Best World could wait till the ex-dividend date when the share price adjusts downward and when short-term speculators take money off the table.