MLM business prospers

Hai-O reported a 1H17 core net profit improvement of 63.8% to RM 25.7m, coming above our and consensus expectations. The group’s multi-level-marketing (MLM) division drove earnings as Hai-O saw recurring sales as well as additional revenue from the increase in distributors. We increase our TP to RM 3.68 and upgrade to HOLD.

1H17 above expectations

Hai-O recorded an increase in 1H17 revenue by 38.4% to RM 178.4m whereas core net profit increased by 63.8% to RM 25.7m. This was above our and consensus expectations, accounting for 60% of full year estimates (note that 1H has historically been weaker at 43-48% of full year earnings). This is mainly due to higher than expected revenue growth, lower marketing and distribution costs (7.5% of revenue vs forecast of 13.3% of revenue) and lower effective tax rate (23% vs forecast of 25%). The Group declared a DPS of 5 sen (vs 4 sen in 1H16).

MLM division growing strongly among weaker divisions

The Group’s 1H17 results continue to be driven by its MLM division (75% of revenue) where turnover and PBT for its MLM segment increased by 62.7% yoy and 88.4% yoy to RM 133.9m and RM 26.0m respectively due to higher recurring sales for most products, especially its “small ticket” items in the personal & household, beverage and healthcare segment. In addition, the group has been actively growing its distributor force, doubling the number of new members yoy and is estimated to reach over 100,000 distributors. The wholesale division (14% of revenue) recorded a decrease in revenue of 1.2% yoy due to the increase in ASP, inclusive of a one-off re-export sale of about RM2m, but saw an EBIT jump by 32.4% yoy. The retail division was weak and posted a drop in revenue by 4.1% yoy and a pre-tax loss of RM 0.06m due to lower demand for high-margin items and higher operating costs.

Upgrade to HOLD with higher TP of RM 3.68

We forecast higher growth in the MLM business and lower operating costs and increase FY17-19E earnings by 30-34%. We increase TP to RM 3.68 (from RM2.78), based on its 5 year historical PE of 12x CY17E and upgrade our call to HOLD. Note that HAI-O has been actively buying back its shares and currently holds close to 4.6% of its total issued and paid-up share capital which brings up the possibility of a share dividend distribution to shareholders. Key upside and downside risks to our call: i) a stronger/weaker upturn in consumer spending; ii) lower growth of members for the MLM business.

Proposed 1-for-2 Bonus issue and ESOS

Separately, Hai-O has proposed a 1-for-2 bonus issue to increase share liquidity. Hai-O has also established an employees’ share option scheme (ESOS) of up to 15% of its issued and paid-up share capital. The proposed ESOS is expected to be implemented after the completion of the proposed bonus issue in 2QCY17.

Source: Affin Hwang Research - 22 Dec 2016