Ending on a High Note

Hai-O’s FY17 core net profit of RM 59.3m came within our and consensus expectations, driven by the multi-level marketing (MLM) segment as membership continues to grow strongly. We believe the MLM segment still has more room to grow and reiterate our BUY call with a higher TP of RM 4.92 as we roll forward our valuation to CY18E.

4Q17 Usually the Strongest Quarter, FY17 Within Expectations

Hai-O recorded an increase in 4Q17 revenue and core net profit of 34.3% yoy and 63.3% yoy to RM 118.4m and RM 18.3m, bringing FY17 revenue to RM404.0m (+35.7% yoy) and core net profit to RM 59.3m (+63.1% yoy). This was in line with our and consensus expectations, accounting for 101% and 103% of full-year estimates. FY17 EBIT margin increased by 2.9ppts yoy to 19.1% due to the MLM segment (+2.0ppts yoy to 19.9%) and Wholesale segment (+6.8ppts yoy to 17.3%) which mitigated the drop in the Retail segment (-0.8 ppts yoy to 3.4%).

MLM Division Growing Strongly

The group’s FY17 results continue to be driven by its MLM division (76% of revenue) where turnover and PBT for MLM increased by 55% yoy and 71% yoy to RM308.7m and RM62.6m, respectively. We attribute this to the group’s growing distributor force which is currently expanding at an average of 5,000 distributors/mth and has reached over 100,000 distributors ytd. We believe its “small ticket” items (personal & household, beverage and healthcare segments), coupled with the rebranding of their key beverage product “Min kaffe” and the launch of two new items in the beverage and skincare category during the financial year have contributed positively to earnings. The wholesale division (13% of revenue) recorded a decrease in revenue of 3% yoy due to a drop in sales volume from domestic medical halls, but saw PBT rise strongly by more than 50% yoy to RM9.1m due to higher margin sales from premium products. The retail division posted flat revenue due to weak consumer sentiment but PBT decreased by 22% to RM1.4m due to lower sales from house-brand products and higher staff costs.

Maintain BUY With Higher TP of RM4.92

We roll forward our valuation to CY18E and increase our TP to RM4.92 (from RM4.22), using the same PE ratio of 18x. We are positive on Hai-O’s management quality and its ability to deliver growth going forward, and we reiterate our BUY call on the stock. Key risks to our call: i) loss of distributors in the MLM division; ii) lack of new exciting products to enhance growth; and iii) further weakness in the wholesale/retail division.

Source: Affin Hwang Research - 30 Jun 2017