• Sell-off in Y Ventures Group (SGX:1F1) could be overdone after 75% decline in Y Venture's share price YTD.
• Y Ventures Group will focus more on books and differentiated merchandise and is looking to monetise its data analytics in a bid to turn around to profit.
• We upgrade Y Ventures Group from Reduce to ADD with a higher Target Price of S$0.15 as we look to a possible turnaround on strong sustained sales growth ahead.

Working Towards Returning to Profitability

A recap on FY18 losses

• Following a restatement of its 1H18 results from profit to losses in Jan 19, Y Ventures Group (SGX:1F1)’s net loss enlarged to US$2.6m in 2H18 (1H18: loss of US$0.6m), below expectations. This led to FY18 net loss of US$3.6m (171%/250% of our/consensus full-year forecasts), mainly attributable to a 12%-point drop in gross margins to 30.5% and higher operating costs.
• The drag in gross margins was mainly due to a plunge in the selling prices of its non-book products amid a surge in the number of competing manufacturers selling directly to consumers online. One such product that sold well in the past was its wall clock, which could previously retail for as high as US$40, but a quick search on Amazon.com showed that these products now sold for as low as US$10 or below as a result of a lack of differentiation with other competing products.
• The increase in operating costs was mainly due to one-off costs, including provisions against doubtful receivables, bad debts written-off as well as an incurrence of start-up costs amid Y Ventures Group’s expansion into new markets, such as China and Malaysia, and an initiative for an initial offering of AORA coins. These expansion moves and initiative, however, have not borne as much fruit as management had hoped.

Cutting back on private labels

• In a bid to turn around from losses this year, Y Ventures Group will reduce its number of private label products by 80% and focus on niche products in select categories, such as home, travel and fitness, that could bring better margins.
• Given the success of its crowdfunding campaign for the launch of Faire Leather bags, Y Ventures Group will again tap crowdfunding sites to launch new products in online markets so as to offset upfront costs in product marketing and advertising.
• We think these initiatives now reflect a more down-to-earth approach to achieving profits from new products online given the better cost efficiency.

Focus on its core: driving more sales of books

• Y Ventures Group will also focus on increasing sales of books, which now fetch better gross margins and have lower inventory risks as its agreements with book suppliers allow for the return of unsold book inventories of up to 30% of the purchased quantity. By our estimates, books still enjoyed healthy sales growth of about 22% in FY18 and accounted for 81% of FY18 revenue.
• Y Ventures Group has also secured seven more book publishers during the year, up from a single publisher in 2017, i.e. Elsevier. Thus, we think book sales could boost revenue in FY19/20F. As at end-FY18, Y Ventures Group’s inventory stood at US$9.6m, of which 85% were book products.

Looking to monetise data analytics capabilities

• While Y Ventures Group will still leverage its in-house data analysis capabilities to identify innovative products and drive its own sales growth, it now plans to offer analytic services, including digital marketing and online channel access, to overseas brand partners. This could provide an additional revenue stream with minimal cost increment, although we think this will take time to translate into a significant contribution to earnings.

Possible turnaround in FY20F

• The selling prices of books are also expected to increase as Y Ventures Group had previously discounted the prices of books from new publishers in various online markets in a bid to gain market share. Thus, we think the overall gross margin could creep up in FY19-20F as we project the gross margin for its non-book products and waste management services (c.3% of FY18 revenue) to remain stable at current levels.
• Previously, we had assumed revenue will falter in our forecast periods but Y Ventures Group has since revealed its sales breakdown by product segment, which showed that book products still recorded healthy sales expansion.
• Management also expects selling and distribution expenses to be reduced as a percentage of sales as Amazon charges a nominal fee based on the weight of the package and as Y Ventures Group looks to streamline its cost base further. Assuming sales growth of its book products remains healthy and operating expenses normalise after excluding one-off costs (c.US$1.3m) in FY18, we anticipate a possible turnaround to profit in FY20F.

Seeking to Improve Corporate Governance

Engaging Deloitte to conduct independent review

• Y Ventures Group has engaged Deloitte to conduct an independent review of its internal controls for its earlier financial reporting periods following damaging revelations made on 21 Jan of erroneous accounting.
• Separately, the company also appointed a new Executive Chairman, Mr Eric Lew, who was formerly Executive Director of Wong Fong Industries (SGX:1A1).
• We think these are positive steps taken to boost confidence in the market that its financials can be relied upon, although we are also mindful of the remote possibility that the independent review yields an unfavourable outcome and dents the stock price.
• Other steps taken by Y Ventures Group to avoid a repeat of misstatement of its financials include:
  • Developed a computerised inventory management system to track all transactions in place of manual tracking previously done on Microsoft Excel.
  • Consolidation of accounts now done on a monthly basis as compared to half-yearly consolidation previously.
  • Expanded the finance and accounting department from four to six staff, including certified public accountants.

Valuation

Upgrade to ADD; higher Target Price of S$0.15

• We upgrade our call from Reduce to ADD as we believe that Y Ventures Group’s losses could start to narrow from here on towards a potential turnaround to profit of US$1.1m in FY20F.
• Y Ventures Group is currently trading at 7.8x FY20F P/E, a 75% discount to global peers’ average of 31x.
• Our Target Price is raised to S$0.15, now pegged to 20x FY20F P/E (35% discount to global peers; previously 1.7x FY20F P/S) but still below its IPO price of S$0.22.
• Potential re-rating catalysts include a quicker turnaround to headline profits.
• Key risks include faltering sales, termination of distributorship agreements and an unfavourable assessment from the independent review.

Source: CGS-CIMB Research - 22 Mar 2019