Hai-O recorded a weak set of results. 9MFY19 core earnings declined 34% yoy to RM37.4m, which missed our and consensus expectations at for 68% and 62% of full-year estimates respectively. The MLM segment continued to underperform, as quarterly sales fell both sequentially (-11%) and yoy (-25%) while members’ activity remains subdued. Margins also declined as a result, weighed down further by higher marketing costs. We maintain HOLD on Hai-O with a lower TP of RM2.50, after revising our EPS estimates lower as we turn less upbeat on its MLM segment’s performance.

Below Expectations

Hai-O’s 9MFY19 core net profit declined 33.9% yoy to RM37.4m, mainly due to a sustained slump in MLM segment sales (-35.1% yoy) to RM177.5m which corresponded to a 30.9% fall in EBIT to RM36.3m. Lower intersegment sales from the Wholesale front also weighed on operating profit (-52.7% yoy), despite the segment recording a flattish 0.6% external top-line growth. Meanwhile, the Retail segment fared better as sales grew 11.4% yoy to RM31.0m, but nonetheless continued to be a minor earnings contributor.

Weaker Sequentially

On a qoq basis, 3QFY19 earnings declined 6% vs. 2QFY19 to RM12.8m, underpinned by lower sequential sales from its MLM (-11% qoq) and Wholesale (-5.3% qoq) segments. In view of the MLM segment’s subdued member activity as well as the challenging business environment currently seen, Hai-O’s management intends to re-strategise its members’ recruitment and retention plans, while moving towards “small-ticket” items at affordable price points.

Maintain HOLD With a Lower TP of RM2.50

We cut our FY19-21E EPS estimates by -8.0%/-14.4%/-15.1% respectively to reflect our view of persisting challenges seen for its MLM segment, both in terms of its member base’s activities, as well as reception for its product range. Following on, we derive a lower TP of RM2.50 after rolling forward our valuation base to FY20E, while based on an unchanged PER target of 13x. Maintain our HOLD recommendation on Hai-O. Upside/downside risks: i) strong/weak expansion in MLM distributor base; ii) better/lower-than-expected take-up rate of new products.

Source: Affin Hwang Research - 26 Mar 2019