Y Ventures Group Ltd - CGS-CIMB Research 2019-01-24: Erroneous Accounting Reveals Dismal Situation


Y Ventures Group Ltd - Erroneous Accounting Reveals Dismal Situation

  • Y Ventures announced several erroneous accounting entries that led to it restating its 1H18 results that turned into losses.
  • It expects to report losses for FY18, citing adverse impact from competing manufacturers selling directly to consumers and higher opex.
  • We think concerns over continuing losses are yet to be priced in, based on current consensus estimates. Downgrade to REDUCE.

1H18 results turned into losses after restatement

  • Y VENTURES GROUP LTD. (SGX:1F1)’s latest announcement revealed that several erroneous accounting entries were made in its 1H18 results, which led to a higher opex of US$1.2m after restatement. This resulted in a net loss of US$1.0m for 1H18 (vs. a net profit of US$0.1m previously).

Guided for net loss for the full year

  • Y Ventures also expects to report a net loss for FY18, citing increasing trend of manufacturers selling directly to consumers online and higher operating expenses as main attributing factors.
  • Restated 1H18 results showed a significant drop in gross margin to 33%, the lowest since FY14, vs. 1H17’s 41%. Inventories were also reduced by US$1.5m after restatement, which now showed a lower inventory balance of US$4.4m as at end-Jun 18.

Direct selling from manufacturers could persist

  • We think the trend of manufacturers selling directly to consumers online could persist for longer periods amid rising number of Chinese sellers on Amazon marketplaces. This could erode Y Ventures’s gross margin further as we believe it will not be able to compete with China-based sellers on Amazon and other marketplaces in terms of prices and quantity.
  • A strong surge in online sales in Southeast Asian marketplaces could potentially be a saving grace although this might not offset its declining US online sales, in our view.

Losses could continue

  • Along with lower gross margin assumptions of 30% in our FY19-20F forecasts, we cut our FY19-20F revenue forecasts by 60-75% as we anticipate Y Ventures to cut back on inventory purchases to manage its cash flows.
  • As Y Ventures’s sales are largely dependent on US online marketplaces that are facing increasing numbers of China-based sellers, we do not anticipate a turnaround in the short term. As such, we now expect the company to report losses in FY18-20F, vs. our previous profit forecasts.

Downgrade from Add to REDUCE

  • We downgrade Y Ventures from Add to REDUCE with a lower Target Price of S$0.10, now pegged to 1.7x FY20F sales, representing 10% discount to peers’ average of 1.9x P/S.
  • Upside risks include a significant pick-up in gross profits that could lead to a quick turnaround to headline profits.

Colin TAN CGS-CIMB Research | https://research.itradecimb.com/ 2019-01-24
SGX Stock Analyst Report REDUCE DOWNGRADE ADD 0.1 DOWN 0.560