We recently met up with Hai-O’s management for an update on the company’s outlook. Our key takeaways were: (i) soft market conditions afflicting the MLM segment; (ii) new products and promotions in response to the former; and (iii) more resilient prospects for its Retail and Wholesale segments. Subsequently, we hold onto our FY19-21E EPS estimates respectively while taking note of Hai-O’s dividend policy which would remain in place, offering attractive yields of 4.5%-5.6% at current levels. Maintain HOLD with an unchanged TP of RM2.50.

MLM Underperformance Dragged on 9MFY19’s Results

To recap, Hai-O’s 9MFY19 results disappointed both our and consensus expectations, accounting for only 68% and 62% of our previous FY19E estimates respectively as the MLM’s segment’s sales performance (-35% yoy) remained lacklustre. Management experienced challenges with membership attrition (falling from a peak of 160k distributors) following the company’s 25th anniversary grand sales promotion in 1HFY18, alongside persisting weakness in the market. Other segments including the Wholesale and Retail segments performed better, but collectively contributed only c.26% of group EBIT FYTD.

Reshuffle in MLM Strategy Amid Soft Market Conditions

In order to revitalise its MLM segment’s depressed distributor base, management is looking to carry out a revamped recruitment and retention program throughout 2019, while launching a new product pipeline focused on “small-ticket” items which acknowledges the shift in market demand.

Turbulent Quarters Remain Seen Ahead

While a shift in the company’s strategy for the MLM segment reflects well on management’s planning in response to the change in underlying market conditions, we believe the company could be set for more volatile performances in 2019. Sequentially however, we expect a stronger 4QFY19 due to seasonally better performance for the MLM segment.

Maintain HOLD

Although management’s pivot could pay off in the long run, we foresee CY19 to remain challenging for Hai-O. Consequently, we maintain HOLD on Hai-O with a unchanged TP of RM2.50 based on an unchanged 13x FY20E EPS. 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 - 8 Apr 2019