SINGAPORE (Feb 28): Analysts are divided over Best World International, as the group announced a 29% increase in earnings to $28.1 million in the 4Q18 ended December amid news that it plans to conduct an independent review on its business and accounting practices.

The stronger bottomline comes as the direct-selling company and seller of premium skincare products to franchisees in China transitions from an export model to a franchise model in the China market.

See: Best World posts 29% rise in 4Q18 earnings of $28.1 mil; proposes final and special dividend

But Best World saw its stock price plunge this past week, after an article by The Business Times on Feb 18 questioned the shroud of secrecy over the group’s franchisees and raised concerns over its direct selling license in China.

In response, Best World on Feb 23 issued a statement to clarify the issues raised and said it would be launching an independent review. It adds that it intends to publish and report its findings to its audit committee as well as to SGX RegCo.

See: Best World shares slide over 20% after weekend announcement of independent review

From its 52-week peak of $3.30 on Feb 11, shares in Best World sank as low as $2.01 on Feb 25.

As at 3.25pm on Feb 28, shares in Best World have climbed back to $2.46 – albeit still trading 3.9% down for the day.

“Over-exuberance in the market resulted in its share price soaring 24% in the first two weeks of February over no apparent news, before collapsing on concerns raised in the Business Times article,” says RHB Research analyst Juliana Cai in a Friday report.

“Since the share price has now retraced to a more reasonable level, we see value emerging, given the strong growth prospects in its China franchise business,” she adds. “We believe the move towards greater transparency will build greater confidence among the investment community.”

RHB is keeping its “buy” call on Best World and raising its target price to $2.95, from $1.97 previously.

Cai says this on the back of stronger earnings growth as well as a higher target price-to-earnings (PE) multiple of 18 times to reflect increased clarity in the franchise business’ margins.

“While we are confident of the near-term earnings prospects, we caveat investors to avoid chasing share price when valuation runs way too high,” Cai warns. “Unlike a usual retail business, Best World’s direct selling model and franchise model operate largely by ‘social selling’. This business model itself innately has limited visibility in end-consumer demand.”

Meanwhile, CGS-CIMB Research is downgrading Best World to “reduce”, from “hold” previously.

“We believe most of the forward growth has been priced in,” says analyst Cezzane See in a Thursday report.

However, CGS-CIMB is raising its target price to $2.43, from $1.90 previously, as it lifts its PE valuations in light of the strong growth.

“We lift our FY19F and FY20F net profits by 5.5% and 7.5% respectively on higher revenue growth, especially from China,” See says.

According to RHB valuations, Best World trades at an estimated PE of 18.1 times and a dividend yield of 2.8% for FY19F.