Hai-O’s FY19 results missed expectations. Core net profit fell 34% yoy, accounting for only 94% of our and consensus’ full-year estimates. Sales slumped 29% yoy while margins also recorded a dip, primarily driven by the MLM segment’s bleak performance. Heading into FY20, the group’s prospects remain challenged by tough operating conditions afflicting its MLM business, in our view. We cut FY20-21E EPS forecasts by 20-26% and subsequently downgrade Hai-O to a SELL (from Hold), with a lower TP of RM1.80.

Below Expectations

Hai-O’s FY19 core net profit declined 34% yoy to RM47.4m, as sales in its MLM segment fell 36% yoy amid depressed distributor activity and a shift in product mix towards smaller ticket items, which overall contributed to a 1.6ppts yoy decline in group EBIT margin despite better margins for smallticket items. Both the Wholesale and Retail segments recorded lower revenue as well (-7% / -2% yoy respectively), led by a drop in sales for nonpatented medicine products for the former, and lower sales of premium food supplements for the latter. On a brighter note, dividend payout remained high at c.80%, bringing FY19 DPS to 13sen (FY18: 20sen).

Incentive Trip Campaign Failed to Revitalise MLM Sales

4QFY19’s bleak MLM performance fell short of our expectation for a sequential recovery. Sales further declined 16% qoq to a multi-year low last seen in 2QFY16, while membership recruitment and renewal remained lacklustre. This came despite Hai-O’s launch of its overseas incentive trip campaign (Melbourne) during the quarter, alongside other promotions such as its monthly flash sales program launched in March. We infer that the group could be bleeding market share amid an overall plateauing direct selling market, whereas 1QCY19 sales held up for the market leader, Amway. This is possibly due to less excitement for Hai-O’s recently launched products such as its relatively new Infinence brand fashionwear while Amway retains a reputable brand image in the local market.

Downgrade to SELL

We cut our FY20-21E EPS estimates by -20%/-26% respectively, mainly to account for structural challenges seen hampering Hai-O’s MLM segment – its key earnings driver. Subsequently, we ascribe a lower TP of RM1.80 (from RM2.50) after pegging a lower FY20E PER multiple of 12x (from 13x) based on -1SD of its 3-year historical average. Thereafter, we downgrade Hai-O to a SELL (from Hold). Upside risks: i) recovery in MLM distributor base; ii) better-than-expected take-up rate for its new products.

Source: Affin Hwang Research - 26 Jun 2019