Hai-O’s 1HFY19 core earnings declined 37% yoy to RM25m, which came in below our and consensus expectations, accounting for 40% and 34% of full-year estimates (prior to revisions) respectively. The disappointment was mainly due to the MLM segment, which missed our expectations, as sales were lower while overall margins declined. In view of our revised expectation of a less upbeat sales growth for Hai-O – the MLM segment in particular, we trim our earnings forecasts by -11.5%/-9.8%/-6.6% for 2018E/19E/20E. Maintain HOLD with a lower TP of RM2.70 at a 13x CY19E PE target (from RM4.00 at 17x PE target).

Below Expectations, 1HFY19 Core Net Profit Down 37.4% Yoy

Hai-O’s 1HFY19 core net profit fell 37.4% yoy to RM24.6m, largely driven by a sharp decline in MLM segment sales (-38.8% yoy) which also posted a -36.4% decline yoy in 1HFY19 operating profit, albeit from a high base due to 1HFY18’s 25th anniversary promotional drive. Yet, distributors’ activities from the MLM division were subdued and continued to prolong into 2QFY19, even after the Raya period (1QFY19) and post-GE14 uncertainties. 1HFY19 EBIT margin declined by 1.6ppts yoy to 18.7%, further led by higher marketing and promotional costs incurred as well as lower Wholesale division earnings.

Sequentially Stronger, But Still Appears Subdued

Sequentially, 2QFY19 core net profit rose 23.7% qoq to RM13.6m, driven by higher sales recorded (+15.1% qoq) and the MLM segment’s margin improvement, as well as lower marketing spend and better sales mix as a result of top-line contribution from its newly introduced “Infinence” brand products. On the other hand, Wholesale margins remain weak, attributable to lower inter-segment sales qoq but the impact was minimal on the group.

Maintain HOLD With Revised TP of RM2.70

In the next three years, we foresee a less upbeat sales growth in Hai-O’s MLM segment, though we expect the decline in sales to stabilize on the back of more new products roll-out and of which may fetch better margins. Members’ activities and recruitment are expected to normalize, though we expect domestic market consumption of Hai-O’s health-related products to face competition. As such, we cut FY19-21E EPS by -11.5%/-9.8%/-6.6% respectively. Consequently, we maintain our HOLD call with a revised TP of RM2.70, based on a lower CY19E PE target of 13x (from 17x). Downside/upside risks to our call: i) loss/expansion in MLM distributor base; ii) online competition and new alternative products.

Source: Affin Hwang Research - 18 Dec 2018