All eyes on DXN IPO

“One of the main reasons DXN is coming back to the market is because it will help its growth plans and give assurance to stakeholders”. - Teoh Hang Ching

FINALLY, DXN Holdings Bhd, the direct selling company that sells health products such as lingzhi-infused coffee to far-flung markets like Peru, is making its way to the local stock exchange.

After a delay from last year, the initial public offering (IPO) exercise is supposed to be the largest listing in recent times, with an estimated market value of close to RM3.8bil once the company hits public domain on May 19.

There are some interesting aspects to the listing exercise.

For starters, investors aren’t exactly rushing to subscribe to the offer of DXN shares, according to industry sources. However, the sources add that the book building of the institutional portion of the shares has been fully subscribed at the time of writing, albeit at a lower price of the indicated range.

Meanwhile, some investors aren’t too convinced about the company’s large exposure to Latin America.

Countries such as Peru, Mexico and Bolivia currently contribute around 50% in sales to the group’s total revenue.

“There are local investors who do not fully understand the region and therefore aren’t keen on the Latin America exposure. You could say that it is an ‘acquired taste’ that appeals to certain investors only,” says a banking source.

The current book building exercise has priced DXN shares at between 65 sen and 76 sen each.

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However, if the company’s final price is set at say, 70 sen, it may mean that DXN is actually coming to the market at an attractive valuation.

The multi-level marketing (MLM) industry’s price to earnings or PE ratio, is known to be at least 16 times.

Based on information in the company’s prospectus, DXN’s IPO at 76 sen values the company at a PE of 15.6 times its financial year ended Feb 28, 2022 (FY22) earnings.

For the first eight months of its FY23, DXN posted a net profit of RM188.6mil or 3.61 sen in earnings per share.

If this is annualised out for FY23 and applying a share price of 70 sen, this will work out to an even lower PE ratio.

The forward PE for FY24 could be even lower, going by the company’s track record of growth where from FY20 to FY22, its revenue increased by a compounded annual growth rate or CAGR of 6.1%.

Generally, a lower PE makes a company cheaper and therefore more compelling to investors.

Additionally, if DXN’s final offer price drops to around 70 sen, even the company’s dividend yield, for which it has a fixed policy, could increase.

Another interesting aspect of the listing is the company’s cash generation ability, whereby it is sitting on cash and cash equivalents of some RM498.6mil as of Oct 31, 2022.

Still, the worry some investors have surrounds the long-term sustainability of the company’s profits and operations.

Furthermore, MLMs have sometimes been associated with unsavoury business practices as seen in several cases here and globally.

In assuaging the fears, executive director and CEO Teoh Hang Ching says firstly, the DXN management team is very hands-on in managing its overseas businesses.

Enhancing growth plans

“We constantly travel overseas to administer the operations. Each sale generated by DXN is captured by an internal system and we engage internal and external auditors to audit the records,” he tells StarBizWeek.

DXN was first listed on Bursa Malaysia back in 2003 but was delisted in 2011 after founder Datuk Lim Siow Jin made an offer to take the company private.

The group’s business started with cultivating ganoderma or lingzhi, which is also known as the “king of herbs” within health supplement circles.

Its operations which started in the 1990s now covers the entire spectrum of commercialisation including the cultivation, manufacturing and marketing of ganoderma as well as other herb-related food supplements.

DXN also uses these herbs to make fortified beverages as well as skin care and cosmetic products.

Teoh says one of the main reasons DXN is coming back to the market is for profiling purposes.

“It is not so much about raising funds since we are already cash-rich. Becoming a listed company will help our growth plans and give assurance to stakeholders in terms of our business model and foundation,” Teoh adds.

DXN’s main focus is growth, he says.

“We have high visibility of future growth in term of expansion into existing and new markets, launching of new products, setting up of new production facilities and enhancing our IT system.

“Post-IPO, we are looking to penetrate further into new countries while expanding our presence in existing countries. We have plans to penetrate five new countries this year and next.”

One of its plans is to expand further in India, where he says potential to grow is good. The company is also building another plant there to manufacture its products, on top of its existing six cultivation and manufacturing plants already in the country.

Despite what the market perceives, Teoh says it “appears that we have received a positive response to our IPO”.

The global capital market volatility especially in the third and fourth quarter of last year, egged on by consecutive interest rate hikes, made it difficult to predict the right time to go to the market, and the exact valuations the company should be prescribed, he says.

He admits some of the main challenges in a MLM business like DXN’s include recruiting members amid increasing competition.

Currently, DXN has more than 14.9 million registered members globally and its active member base stands at 3.6 million.

Margin-wise, the company has a net profit margin of around 18% and has implemented at least two rounds of price increases in some of its key markets over the last six months, to manage overall costs.

DXN is backed by Singapore private equity firm KV Asia Capital.