Hai-O posted a disappointing set of 1QFY20 results. Earnings fell 30% yoy as MLM sales slumped 28% yoy to a 4-year low during the quarter. Better performances posted by its other segments failed to provide much respite due to their minor contributions to group earnings. We cut FY20-22E earnings by 16-18% respectively in view of the unabating weakness faced by the MLM segment. We believe the recent shareprice rally is thus unwarranted given this weak set of results. Maintain SELL with a lower 12-month TP of RM1.60 (from RM1.80).

Below Expectations

Hai-O’s 1QFY20 core net profit tumbled 29.6% yoy to RM7.7m as sales from its MLM segment fell for the seventh consecutive quarter yoy to RM42.1m – a four-year low since 1QFY16, despite having over 120k distributors at end-FY19 vs. 83k distributors at end-FY16. This was exacerbated by a 2.6ppts slip in the EBIT margin, led by a 2.0ppts gross margin decline on unfavourable sales mix. Increased revenue recorded for its Wholesale (+9.3% yoy), Retail (+6.7% yoy) and Others (+20.7% yoy) segments provided little relief, as they collectively account for only 20-30% of group earnings. Overall, the results were below both market and our expectations, at 17% and 18% of FY20E forecasts respectively.

Sequentially Weaker

On a sequential basis, core net profit declined 22.7% qoq, as MLM sales declined 11.3% qoq owing to the Ramadan fasting period in May and a continued slowdown in members’ activities, while the response from the February-May 2019 incentive trip campaign was not encouraging. Hai-O has initiated another incentive trip campaign running from July-October 2019, while management is in the midst of reviewing its core business strategies amidst the string of successively weaker performances. We remain wary of its MLM segment’s prospects due to a less favourable range of product offerings following management’s pivot into the highly competitive fashion and apparel space.

Maintain SELL

We cut our FY20-22E EPS estimates by 16-18% respectively, as we pencil in further downside to earnings arising from its MLM business’s persisting weakness. Subsequently, we derive a lower 12-month TP of RM1.60 (from RM1.80) after rolling forward our valuation base to FY21E but with an unchanged 12x PER target. Maintain SELL. Current yields of 3.6%-4.1% look unattractive in view of the bearish earnings outlook. Upside risks: i) recovery in MLM distributor base; ii) better-than-expected take-up rate for its new products; and (iii) higher cost savings.

Source: Affin Hwang Research - 27 Sept 2019